Question 1 The GFA Company, originally established 16 years ago to make football, is now a leading producer of tennis balls, baseballs, footballs, and golf balls. Nine years ago, the company introduced High Flite, its first line of high-performance golf balls. GFA management has sought opportunities in whatever businesses seem to have some potential for cash flow. Recently Mr. Dawadawa, vice president of the GFA Company, identified another segment of the sports ball market that looked promising and that he felt was not adequately served by larger manufacturers. As a result, the GFA Company investigated the marketing potential of brightly coloured bowling balls. GFA sent a questionnaire to consumers in three markets: Accra, Kumasi, and Koforidua. The results of the three questionnaires were much better than expected and supported the conclusion that the brightly coloured bowling balls could achieve a 10 to 15 percent share of the market. Of course, some people at GFA complained about the cost of test marketing, which was GH 250,000. Also, the feasibility test carried out by analysts to assess the viability of the project costs GH 100,000. In any case, the GFA Company is now considering investing in a machine to produce bowling balls. The bowling balls would be manufactured in a building owned by the firm and located near Madina. This vacant building and the land can be sold for GH 150,000 after taxes. Working with his staff, Dawadawa is preparing an analysis of the proposed new product. He summarizes his assumptions as follows: The cost of the bowling ball machine is GH100,000 and it is expected to last five years. At the end of five years, the machine will be sold at a price estimated to be GH 30,000. The machine is depreciated on straight-line basis. The company is exempt from capital gains tax. Production by year during the five-year life of the machine is expected to be as follows: 5,000 units, 8,000 units, 12,000 units, 10,000 units, and 6,000 units. The price of bowling balls in the first year will be GH20. The bowling ball market is highly competitive, so Dawadawa believes that the price of bowling balls will increase at only 2 percent per year, as compared to the anticipated general inflation rate of 5 percent. Conversely, the plastic used to produce bowling balls is rapidly becoming more expensive. Because of this, production cash outflows are expected to grow at 10 percent per year. First-year production costs will be GH10 per unit. Also, Soft Flite a substitute product, is expected to have a drop in its sales by 1000 units per annum. The selling price per unit of existing products is GH5 while the variable cost is GH 4. This has no tax implications for the new product. Dawadawa has determined, based on GFAs taxable income, that the appropriate incremental corporate tax rate in the bowling ball project is 34 percent. Like any other manufacturing firm, GFA finds that it must maintain an investment in working capital. Management determines that initial investment (at Year 0) in net working capital of GH10,000 is required. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital will decline to zero as the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the projects life. GFA will finance the total investment required for the production of the balls (including working capital investment) by issuing 100,000 new common stocks at GH 2 per share from its existing shareholders. A total of GH 200,000 is expected to be raised from the rights issue. It expects to finance the remaining from a bank loan from GDB at a rate of 12%. Mr. Dawadawa has estimated the beta of the project to be 2.5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the rate on Government of Ghana traded Treasury bills is 5%. Required: a. Evaluate the project using NPV and advise the Management of GFA whether or not it should introduce the bowling balls (12 marks) b. Discuss three (3) qualitative factors that the Management of GFA might have to consider before making a decision. (3 marks) c. What does the beta of the project represent and how will higher project betas affect your decision? (2 marks) d. Compare and contrast the beta of the project and explain how it will affect the return on investment of the project. (3 marks) (Total: 20 marks)

Question 2 The Government of Ghana in an attempt to stimulate the Ghanaian economy after the COVID 19 pandemic has set aside GH600 million as a stimulus package for businesses. These stimulus packages are to be in the form of soft loans for businesses. However, some believe that these loans must be extended to firms in industries that are worst hit by the pandemic. As the Finance Director of your company, you have been tasked to present a proposal to the Board of Directors of your company for consideration. Your proposal must address the following; i. The negative impact of the COVID 19 pandemic on the operations of your firm, justifying why your firm needs such a stimulus package? Your arguments should be situated within the industry within which you operate. ii. With your understanding of lessons on capital structure, which other four (4) factors should your firm consider before choosing this source of debt finance? iii. Discuss four (4) risks that your company is likely to be exposed to if it goes ahead with this source of debt finance. iv. Explain how this decision will affect the return to the equity holders or shareholders of your company following the arguments of M&M proposition 2. (Note: Your essay should not be more than 1500 words. Marks will be awarded for professional presentation) (Total: 20 marks)

Question 3 King Solomon- The Rich Farmer King Solomon is a rich farmer in Tetebia, a town in the Asou Municipal Assembly. He owns over 100,000 hectares of farmlands. However, he fears the worst might happen and wants to do some investments to secure his future and that of his children. He is contemplating several long term investments he could undertake to secure his future and that if his children. He is now 50 years old and he plans to retire in 10 years from active farm work. He expects to live for another 25 years after he retires that is, until age 85. He heard about an investment in the financial market will help him plan his retirement well. He has no idea about financial markets and how they operate. You recently graduated and have just reported to work as an investment advisor at the brokerage firm of Cenden Ltd. King Solomon has approached your company for advice. Your boss after a discussion with King Solomon could gather the following information. King Solomon wants his first retirement payment to have the same purchasing power at the time he retires as GH 40,000 has today. He wants all of his subsequent retirement payments to be equal to his first retirement payment. (Do not let the retirement payments grow with inflation: King Solomon realizes that the real value of his retirement income will decline year by year after he retires.) His retirement income will begin the day he retires, 10 years from today, and he will then receive 24 additional annual payments. Inflation is expected to be 5% per year from today forward. He currently has GH 100,000 saved up, and he expects to earn a return on his savings of 8% per year with annual compounding. Again, he wants to have a secure university education for his lovely daughter Daisy. His daughter is now 13 years old. She plans to enroll at the University of Professional Studies, Accra in 5 years, and it should take her 4 years to complete her education. Currently, the cost per year (for everything her food, clothing, tuition, books, transportation, and so forth) is GH 12,000 per year. This cost is expected to remain constant throughout the four-year university education. The daughter recently received GH 7,500 from her grandfathers (King Davids) estate; this money will be invested at a rate of 8% to help meet the costs of Daisys education. The rest of the costs will be met by money King Solomon will deposit in a savings account which also earns 8 percent compound interest per year. He will make 5 equal deposits into the account, one deposit per annum starting one year from now until his daughter starts university. These deposits will begin one year from now. (Assume that school fees are paid at the beginning of the year). Your firm also serves as the investment adviser for Zenzo Pharma Ltd which intends to issue bonds to finance the production of its new vaccine. The bond has a face value of GH10,000 at a coupon rate of 12% and a term to maturity of 10 years. The bond expects to pay coupons semiannually. Your firm however insists on Zenzo Pharma including a call and a sinking fund provision in the bond indenture. The required rate of return on the market for bonds with similar features is 18% per annum. Required a. Explain to King Solomon what financial markets mean and which three (3) financial instruments he can invest in. (4 marks) b. To the nearest cedi, how much must he save during each of the next 10 years (with equal deposits being made at the end of each year, beginning a year from today) to meet his retirement goal? (Note: Neither the amount he saves nor the amount he withdraws upon retirement is a growing annuity.) (5 marks) c. What will be the present value of the cost of 4 years of education at the time the daughter Daisy turns 18? (2 marks) d. What will be the value of the GH 7,500 that Daisy received from her grandfathers estate when she starts college at age 18? (2 marks) e. If King Solomon is planning to make the first of 5 deposits one year from now, how large must each deposit be for him to able to put his daughter through college? (2 marks) f. Explain to King Solomon what call provisions and sinking fund provisions are and how these provisions are expected to affect the risk of the bond (2 marks) g. Which value will you place on a bond of Zenzo Pharma Ltd? (3 marks)