NAME: FUNGAYI JOHANE MAJURIRA

STUDENT ID: 21981559

COURSE: CORPORATE FINANCE

COURSE CODE: BBAC 351

PROGRAM: BACHELOR OF BUSINESS IN ACCOUNTING

LECTURER

DATE: 6 June 2022

Final Exam

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SECTION A
QUESTION ONE

(i) Identify and explain the role of the Chief Finance Officer (CFO as it relates to
company registered as Public Limited Company

Chief among the most important statutory requirements for a company to be listed on the
stock exchange is that it should have appointed or recruited a Chief Financial Officer prior
to registration whose duties and role will be to certify that the company’s financial
statements are reliable and accurate. Cutelir Ltd has already fulfilled this requirement.

The Chief Financial Officer of a Public Limited Company is appointed or recruited by the
Board of Directors. He will almost always automatically becomes Vice chairman of the
Board of Directors. Below him will be finance controllers, treasurers and finance mangers
and accountants who belong to the departments that oversee the financial transactions of
the company. He is the head of that division of the company that much raise money for the
company and safeguard the income generated by taking cost saving measures. The major
roles of the Chief Financial Officer can be categorized as being that of: Stewardship,
Operator, Strategist and Catalyst.

The Chief Financial Officer as a Steward protects the vital assets of company, ensure
compliance with financial regulations, close the books correctly, and communicate value
and risk issues to investors and the Board. The Chief Finance Officer ensures all documents
regarding the registration of the firm as a listed company are in place that include
certificate of registration, Memorandum and articles of association and proof of operating
addresses. He reports on things that have happened as well as a plan of what must happen
to ensure continuity and increase in shareholder value.

The Chief Finance Officer has fiduciary duty of providing the initial company value. This
will be used to determine the nominal values of the share. As an Operator he must manage
the present. He must oversee and manage an efficient and effective finance process that

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include financial planning and analysis, cashflows and management of risk. He oversees the
generation of money and has the onerous task of deciding how and where to invest the
money, a task that requires a careful balance between risk and liquidity. He is the glue that
binds all departments to ensure they are well funded and be on spot to identify any
potential challenges that may affect the smooth flow of operations.

As a Strategist he looks forward. Raising money today does not guarantee that it will be
raised in the same way tomorrow. His role is to ensure that that money is raised again
tomorrow if not more. He provides financial leadership and strategy so as to keep actions
and decisions in harmony with the overall goals of the company. The success of the
company depends on solid long-term investments and well mapped courses that
guarantee the future is brighter. He identifies and reports the areas of the company that are
most efficient and those that are underperforming. He identifies those areas of the business
need tighter cost control or are overspending their approved and allocated budgets. The
Chief Financial Officer has to have the skills and resources to focus on parts of the business
that are vital to its survival.

The Chief Financial Officer as a Catalyst he makes things happen. He looks at the current
state of equipment, human capital, even data generating software, he initiates
improvements in all spheres of the business involvement. Because they control the money,
using this power he works to reduce costs, improve processes and revive the company in a
way that add value and stability. The company will therefore take advantage of the CFO’s
keen insights to tap into new markets and be the industry trend setters.

The Chief financial Officer should also seek to address the company capital budgeting of
equipment and any long-term investments. He should also seek to address the company’s
capital structure to finance these investments through a mix of debt and equity. He should
also seek to address the working capital management to ensure the company is always
liquid to be able to meet immediate obligation once they arise.

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The Chief Finance Officer should also reflect the prospectus of the company. He/She should
also provide current capital structure and the projected capital structure after listing has
taken place taking into consideration the resultant accompany appetite of debt. As
evidenced in Cuteir Ltd it started at 100 percent equity finance, with weighted cost of
capital of equity of 10 percent. The Chief Finance Officer should emphasize to the company
shareholders of the probable cheapness of equity but with a negative consequence of
diluting each shareholder’s gain.
The Chief Finance Officer should advise the Directors of Cutelir Ltd that debt is a cheap
form of finance as it enjoys the debt tax shield. The only challenge is that as the company
becomes heavily geared it becomes expensive and may lead to liquidation as interest is
mandatorily supposed to be paid compared to equity where dividends can be postponed.
The Chief finance Officer should issue the financial statements and all returns as and when
they are due.

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(ii) Ke = De
Se

Ke = cost of equity = 10%

De = Current dividend payable 10 % * K100,000 = 10,000

∴ Se = De
Ke

100,000 = K1,000,000
0.10
Se = Current share value = K1,000,000

∴ The value of company without debt = K1,000,000

(iii) Interest payable to debt holders = 5% * K300,000

= K15,000

(iv) Net Income = 100% - Net Operating Income - Finance Cost

K100,000 – K15,000 = K 85,000

(v) The value of the company = The value of the company without debt + debt
value
The value of the company without debt = K1,000,000
Market value of debt = I
Kd
I = Interest p.a on K100 nominal
Kd = The investors required rate of return
I = 5% * 300,000 = 15,000
Kd = 5% * 300,000 = 15,000

Value of company after debt = Net Income

WACC
= 1,000,000
0.0625
= K160,000,000

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(vi) Weighted Average Cost of Capital (WACC) = Keg ( E ) + Kd( 1 – t) ( D )
E+D E+D
Where Keg = the cost of equity
Kd = the cost of debt
E = the market value of the company’s equity
D = the market value of the company debt
t = the rate of corporation tax applicable to the company

WACC = 0.10 * (100,000) + 0.05 (1 –t) (300,000)

(100,000 + 300,000) (100,000+300,000)

= 0.10 * 0.25 + 0.05(0.75) = 0.0625

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SECTION B

QUESTION THREE

Project B
0 1 2 3
Initial outlay (3,000) 0.40*2000 0.30*4,000 0.50*3000
Cashflow 800 1,200 1.500
Discount factor@5% 1 0.952 0.907 0.864
Present Value (3,000) 761.6 1,088.4 1,296
Net Present Value = (146)

Project C
0 1 2 3
Initial outlay (500) 0.30*1,000 0.20*2,000 0.40*2,000
Cashflow 300 400 800
Discount factor@5% 1 0.952 0.907 0.864
Present Value (500) 285.6 362.8 691.2
Net Present Value = 839.6

We will undertake project C which has a positive Net Present Value. Since all negative
outcomes are rejecting when using the Net Present Value method of Investment appraisal.

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QUESTION FOUR
There are a number of factors that determine the capital structure of a company. Can you
name five(5) of them only.

Capital Structure is the ratio of different types of securities raised by a firm as its long-term
finance. Types of securities are equity shares, preference shares and long-term borrowing
(debentures). Relative ratio of securities can be obtained by the process of capital gearing
which companies can be divided into highly-geared (being companies which have a
proportion of equity capitalization that is small) and low geared companies with high
equity capital in relation to total capitalization.
The five factors that determine the capital structure of a company are: Equity Trading,
Degree of Control, Cost of Capital, Stability of Sales and Capital Market Condition.

1. Equity Trading
Trading on equity is more important if shareholders have high expectations of the
growth of the company. The Chief financial Officer who is most likely be responsible
for these decisions should weigh on when to trade on equity. Trading on equity will
refer to long-term borrowing of equity share capital at reasonable rates. Equity
shareholders tend to earn additional profit due to the issuance of preference shares
and debentures due when rate of dividends of preference capital and rate of
interest on borrowed capital is lower than the usual rate of company earnings.
2. Degree of Control
The directors of the company are the elected representatives of the equity
shareholders hence if they retain power according to company policies then they
have a majority voting power and very little voting rights for preference holders
and non for debenture holders then the equity structure of the company lies in the
hands of the directors. But if the policy allows otherwise then the equity structure
will lie in the hands of loans and preference holders instead of equity share holders
3. Cost of Financing
In a capital structure the company has to look to the factor of cost when securities
are raised. It is seen that debentures at the time of profit earning of company prove

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 to be a cheaper source of finance as compared to equity shares where equity
shareholders demand an extra share in profits.
4. Stability of Sales
An established business which has growing market and high sales turnover and
ability to meet fixed commitments such as interest on debentures and which have
to be paid regardless of profits and dividends on preference shares. This means
therefore that when sales are high the profits are high and company is able to meet
fixed commitments. If company is having unstable sales then the company is not in
position to meet fixed obligations. So equity capital p[roves to be safe in such cases.

5. Capital Market Conditions

In the lifetime of the company, the market price of the shares has got an important
influence. During depression period the company’s capital structure generally
consists of debentures and loans. When it is time of booms and inflation, the
company’s capital should consist of share capital generally which is equity shares.
In consideration of the above determinants, the following should be also be addressed.

(1) Do our firm have the ability to support the structure – is our return adequate to
cover the repayments. The Attitude of Management and proprietors take up for debt
has a bearing on capital structure.

(2) Attitude of Capital supplier’s also has an implication. The suppliers will be very
stringent as they then look at issues like how high security or collateral, maybe
three times the loan value.

(3) Patterns of Assets and Trading the company may not have the needed collateral for
the bank loan alternatively it will have to raise its finance through alternative capital
structure.

(4) Internal company rationing by directors limiting the company to borrow have also a
bearing on the capital structure.

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 (5) The Demand patterns, also affect the capital structure. The nature of industry will
affect the take up of debt of a firm. A steady sales record will give confidence to
investors and should facilitate raising debt finance. Where a large initial investment
has to be made on entry to the market there will be less chance of competition
entering the market then debt finance is easy to raise.

QUESTION FIVE
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(i) Future Value = Present Value (1 + interest)^n
n = number of yeas
= 100( 1 + 0.05)^3
= K115.7625

(ii) Gratuity after 3 years of 100,000 - FV = ( 1 + r) ^nPV =

Available funds 100,000
Purchase of Loan (90,000)
Loan Redemption (9,000)
Net surplus 1,000

Option 1, the security its already below the principal invested so its unacceptable, if it is
extra income of K115.76 then we will take 1.

In the money market option where it is offering 5% Interest effectively. When we

compound after 3 yeas the value will be 2.5%

Year Cashflow Annuity factor Net Present Value

1-3 1,000 2.723 2,273

I would advise him to Invest with the bank for the next 13 years with a net present value of
K2,723.

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