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QUESTION 1 (a) You have just been employed as the new Chief Executive Officer of a medium-sized company that

is listed on the Ghana Stock Exchange. At the maiden Board Meeting, the chairman advised you and your management team to avoid what he termed as “Agency problem”.

Explain the term “Agency Problem”, and identify four (4) ways by which shareholders can deal with it. (8 marks) (b) Renicard Company Ltd, a consulting firm, has decided to acquire computer/data handling equipment. The company should choose one of two ways of financing the acquisition. Option 1: Renicard Company Limited to lease the equipment on a six-year contract for a lease payment of GH¢18,000 per year, with payments to be made at the beginning of each year. The lease payment will include maintenance. Option 2: Renicard company Limited could purchase the equipment outright for GH ¢90,000, financing the purchase by a bank loan for the net purchasing price and amortizing the loan over a six-year period. Under the borrow-to-purchase arrangement, the company would have to maintain the equipment at GH¢3,000 per year, payable at the end of each year. The equipment will be depreciated on a reducing balance method at 40 percent per annum. The equipment would be disposed of and would have a residual value of GH¢4,199, which is expected to be the market value after six years, when the construction company plans to replace the asset irrespective of whether it leases or buys the asset. Renicard company Limited falls within the 25% tax bracket. The rate of interest is 10% per annum. Should the company lease or buy the computer/data handling equipment? (12 marks) (Total: 20 marks)

QUESTION 2 You find yourself in a situation commonly faced by Financial Managers. Your Managing Director thinks business will improve if you change your current policy of cash sales only to allow for credit sales. Currently your annual sales are GH¢6,000. If you offer 30 days credit, you will need to set up a credit department. You expect that it will cost you GH¢2 to run this department monthly. Naturally, you expect all customers to buy on credit for 30 days. You 1

anticipate that 1.5% and a 0. If your tax rate is 25% by how much must your sales increase to make this change worthwhile? (20 marks) QUESTION 3 The Government of Ghana intends to borrow to finance a nuclear plant in order to increase the energy generating capacity of the country. You must also make additional investments in debtors but not in fixed machinery or other overheads by drawing on your credit line with a bank on which you expect to pay 12% per annum interest on amounts drawn. On this basis YY makes an offer to buy XX. YY has determined that if it combines resources with XX. Your cost of sales has been 60% of sales. Additionally. The Ghanaian government has a choice of two possible $100 million.5% of credit sales will not be collected. five year Eurodollar loans. The first loan is offered at Prime Rate + 1% with 2. (10 marks) Identify four (4) benefits the Government of Ghana will obtain from centralising its international cash management and foreign exchange management.5% syndication fee whereas the second loan is priced at Prime rate + 1. You are required: (a) (b) To calculate the cost of the two loans and advise the Finance Minister on the loan which is preferable. what is the cost of this purchase to YY? (3 marks) 2 (i) . marketing expenses are 25% of sales. cost savings will be worth GH¢25 million today.75% syndication fee. If YY makes a cash offer of GH¢65 million for all the shares of XX. Company YY has a market value of GH¢200 million. The cost of capital is 10%. (10 marks) (Total: 20 marks) QUESTION 4 (a) Company XX has a market value of GH¢50 million.

and is considering issuing 30 shares to the shareholders of XX. three (3) ways by which synergies might be realized in business combinations. Bezec Ltd which prefers a floating rate loan has access to fixed rate funds in cedi-bond market at 11% and floating rate funds at Prime Rate + ½%. (6 marks) (Total: 20 marks) QUESTION 5 (a) Identify and briefly explain the implications of efficient market hypothesis (EMH) for investors and firms. a low rated firm desires a fixed rate. (5 marks) Explain the differences between using currency futures versus currency options to hedge exchange risk.(ii) (iii) What are the gains of this transaction? (1 mark) Suppose YY has issued 100 of its shares to its shareholders. long term loan. (2 marks) (Total: 20 marks) 3 . (8 marks) Calculate how much Asaba Ltd would pay for its fixed rate funds. what is the cost of the share offer? (6 marks) What is the net present value of the transaction under the cash offer to YY? (2 marks) What is the net present value under the share offer? (2 marks) (iv) (v) (b) Explain clearly but briefly. (5 marks) Asaba Ltd. It currently has access to floating interest rate funds at a margin of 1.5% over the Prime Rate. (b) (c) You are required: (i) (ii) To explain how Asaba Ltd and Bezec Ltd can use swap to their advantage. Its direct borrowing cost is 13% in the fixed rate bond market.

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