ICSAN.2016/P203 DEC.00/ICSAN.2016/P203/OCT.18 Praha mitre INSTITUTE OF CHARTERED SECRETARIES AND ADMINISTRATORS OF NIGERIA DECEMBER 2016 DIET: PROFESSIONAL EXAMINATIONS Corporate ' Financial Management (Code: P203) Tuesday Morning, 6th December, 2016. INSTRUCTIONS 1. Answer ALL questions in Section A. All questions carry equal marks. 2. Answer THREE (3) questions from Section B. All questions carry equal marks. 3. Time Allowed: THREE (3) HOURS 4. Candidates are expected to show their workings using the inside cover page, Hee back page and back page of the answer booklet and NOT on the Question 5. Candidates are forbidden from bringing phones into the examination hall. 6. Only non-programmable calculators are permitted for use in the examination. Turn OverSECTION A (Answer all questions in this Section) QUESTION 1 (a) Shareholders are an important stakeholders group, being the owners of the business. State four (4) things that management needs to do in order to meet the needs of shareholders. (4 Marks) (b) Explain what financial derivatives consist. State two (2) examples. (4 Marks) (c) Boyle Lid is expecting to pay a dividend of 20k this year, increasing at a rate of 5 percent per annum. If it's shareholders required return of 15 per cent, calculate the current market value. (4 Marks) (ad) Acompany is raising a 1 for 3 rights issue, with each new share costing N2. The current market price of the share is $3. What is the ex-rights price? (4 Marks) (e) List four (4) characteristics ef a sound appraisal technique which are necessary in determining investment evaluation criterion. (4 Marks) () List four (4) symptoms of overtrading. (4 Marks) (g) Inrelation to cash management, state four (4) functions of the Treasury Manager in an organization. : (4 Marks) (h) The following information relates to Uduak Plc: Earnings per Share (EPS) = 40 Kobo Market Price per Share = 110 Kobo Dividend Yield 7 5% What is Uduak Pic's dividend cover? (4 Marks) Page 2 of 8This information applies to questions | and J. XYZ Ltd has imported $100,000 worth of goods from the United States of America. The amount is payable in 90 days' time. The current spot price of a Dollar is ¥133.0080 while 90 days forward rate is 138.6846. There are no foreign exchange controls. (i) What is the interest rate differential per annum between Nigeria and the United States of America assuming that there is interest rate parity? (4 Marks) (j) Calculate the exchange rate exposure per dollar if XYZ Ltd waited for 90 days when the rate was f138.7080. (4 Marks) (Total 40 Marks} SECTION B (Answer THREE questions from this Section) QUESTION 2 (a) WAHAB LAWAL PLC has in issue the following securities of which details of their present market standings are given: Types of Security Nominal Value | Market Value | Current Yield| Ordinary Shares 4 Million N1 Share | N1.50 per Share | 18 % P. A. 10% Preference Shares | 1 Million Ni Share | 90.9k Per Share | 11 %P. A. 10% Debentures #400,000 41.20 Per Share | 20 % P. A. The company is considering the raising of additional capital andl has been advised by its merchant bankers that the following terms should be considered: * Ordinary Shares: Issue Price 1.40 Cost of issue 5k per Share * 10% Preference Shares: Issue Price 70k Cost of issue 12k per Share * Debentures: Issue Price NIAS Cost of issue 5% of Nominal Value Page 3 of 8Required: (i) Calculate the current WACC (4 Marks) (i) Calculate the marginal cost of equity, preference capital and debt. (12 Marks) (b) You are given the following information about WANDE PLC which is an all equity financed company. The number of shares in issue is 150,000 of AH each. Current Dividend N6,158 Market Value per Share 83.42 Net Assets 315,000 Current Eamings N62,858 Dividend 5 Years ago N2,473 You are required to estimate the cost of capital for the company using the Gordon Model. (4 Marks) (Total: 20 Marks) QUESTION 3 (a). The following data relate to KANKA LIMITED, a maintaining business. The tumover for the year was N20m. Cost as a Percentage of tumover are: Selling and Distribution - 5% Fixed Overhead - 15% Variable Overhead - 15% Direct Labour . 25% Finished Goods - 80% On the Average: Debtors take 2% months before payment; Raw materials are in stock for three months; Work-in-Progress represents 2 months of sales; Finished goods represent one month of sales; Credit is taken as stated below: (i) Direct Materials 2% Months (i) Direct Labour 3 Weeks (iii) Variable Overheads 1 Month (iv) Selling and Distribution Overhead 2.5 Months (v) Labour Force is paid for 50 Working Weeks Page 4 of 8You are required to compute the working capital requirement of the company. (14 Marks) (b) Compare working capital management with working capital cycle. (6 Marks) (Total: 20 Marks) QUESTION 4 a) Explain the concept of mergers and acquisitions. (5 Marks) b) Discuss the various forms of business combinations. (5 Marks) ¢) Briefly outline the various reasons for mergers and acquisition. (8 Marks) d) _ In taking capital budgeting decisions, with risk and uncertainty, you are required to explain the term Sensitivity Analysis. (5 Marks) (Total: 20 Marks) QUESTION 5 a) An Oil and Gas Company has just hired you as the new Finance Manager with your ACIS qualification and you have been offered a fat salary and package with an instruction that "You are expected to maximize the shareholders’ wealth". Discuss specifically FIVE (5) decision areas you will be concerned with in order to justify the confidence reposed in you. (10 Marks) b) "The economic environment within which the Finance Manager must operate is ‘subject to a variety of influences, a major one of which is from Government". Explain FIVE (5) areas in which Government action might affect the problem-solving and decision-making roles of a Finance Manager. (10 Marks} (Total: 20 Marks) QUESTION 6 The Management of CIS Limited is contemplating acquiring a new machine for the company’s use. The company has the option of buying either Machine A or Machine B but not both. The acquisition cost of machine A is 8150 million. It has expected useful life of 4 years with a residual value of N30 million. The machine which will be used in the produc- tion of exercise books is expected to bring in N60 million profit before depreciation in each Of its first two (2) years, $45 million in the 3rd year and¥N25 million in the 4th year. Page 5 of 8: Machine B which will also cost the same amount as. machine A has the same useful li but the expected residual value is N25 million. It has the following expected cash fio pattern: Year 1 2 3 4 Cash Flow N30 million N40 million N60 million N75 million At the management meeting of the company held on 10th January, 2014, the followin arguments took piace between the Technical Director (TD) and the Finance Director (FD TD: As regard the two machines, we should purchase the one that pays back as early a possible, the company's commitment. FD: Good, however, our guide has always been to calculate for each machine, the Retur on Invesiment (RO!) utilizing the Concept of “Average" and select the machine wit a higher ROI. TD: Anyway, the bail is in your court. My view is that we select the machine that will giv us the overall picture of all the transactions involved. FD: Good, my suggestion fits Perfectly into your view of overall picture. Required: (a) Which machine do you Suggest should be purchased based on each of the following: (i) The FD's view (i) The TD's view : (14 Marks, () Mention ONE (1) advantage and ONE (1) disadvantage each of the two (2) methods proposed above. (4 Marks, (6) Is there a more superior method to the TWO (2) above? Explain briefly. (2 Marks, (Total 20 Marks Page 6 of &