Addis Ababa University

College of Business and Economics

School of Commerce
Department of Accounting and Finance
MSc in Corporate Finance: Specialty in Investment Management

TMA 1 Advanced Financial Management

Advanced Financial Management (AFM)

November 2023
Addis Ababa, Ethiopia
1) Discuss about the financial and non-financial objectives
2) Briefly discuss the roles and responsibilities of financial manager
3) Compare and contrast the financing theories such as: POT, MM, Marketing theory, static
tradeoff theory
4) You can invest $10,000 in a certificate of deposit (CD) offered by your bank. The CD is for 5
years and the bank quotes you a rate of 4.5%. How much will you have in 5 years if the 4.5%
is (a) an EAR? (b) a quarterly APR? (c) a monthly APR?
5) Compare and contrast equity and debt financing
6) Briefly discuss the dividend policies such as: stable dividend policy, constant payout ratio;
zero dividend policy; residual approach to dividends
7) The following are extracts from the corporate governance guidelines issued by a UK plc.
(i) All auditors' fees, including fees for services other than audit, should be fully
disclosed in the annual report. In order to ensure continuity of standards the same
audit partner, wherever possible, should be responsible for a period of at least three
years.
(ii) The board shall establish a remuneration committee comprising 50% executive
directors and 50% nonexecutive directors. A non-executive director shall chair the
committee.
(iii) The Chairman of the company may also hold the position of Chief Executive,
although this shall not normally be for a period of more than three years.
(iv) The annual report shall fully disclose whether principles of good corporate
governance have been applied.
(v) No director shall hold directorships in more than twenty companies.
(vi) Directors should regularly report on the effectiveness of the company's system of
internal control.
Required
a) Discuss the extent to which each of points (i) – (vi) is likely to comply with corporate
governance systems such as the UK Corporate Governance Code.
b) Prepare a brief report advising senior managers of your company who are going to
work in subsidiaries in Germany, Japan and the US of the main differences in
 corporate governance between the UK and any two of the above countries, and
possible implications of the differences for the managers.
8) Solar Supermarkets, a listed company, has one sole financial objective which is to maximise
shareholder wealth. It is reviewing the approach that it should take to remunerating its
executive directors and other senior managers. Over the years, the company's share price has
performed well although there is now concern that price and cost competition from overseas
entrants into the domestic market will have a significant impact on the firm's profitability. As
a result, the directors believe that large investment in new technologies and markets will be
required over the next five years. Traditionally, management has been rewarded by salary, a
generous system of benefits, and a bonus scheme that has taken up to 4% of revenue. The
directors are considering introducing a generous share option scheme with a five year vesting
period. There is also a view, expressed by some of the company's principal equity investors,
that the company should consider returning cash to them through the sale of its property
holdings. The company has over 200 stores nationally and 15 overseas, of which all except
five are owned by the company. In the domestic economy, growth in the value of commercial
property has averaged 8% per annum in recent years whilst retail growth has remained static
at 5.5%. A sale and leaseback, or the flotation of a separate property company that would
rent the stores to Solar Supermarkets at commercial rates, are two suggestions that have been
made at investor meetings. Either approach, it is suggested, would return value to investors
and create a supply of capital for further expansion. There have been press rumours, possibly
fed from sources within the investor community, that the company may be a target for a
private equity acquisition. However, no formal approach has been made to the company. The
only other area of controversy to emerge about the company which has concerned the
directors followed an announcement about the company pension scheme. Although the
scheme is well funded the directors took the decision to close the current final salary scheme
to new employees and to replace it with a money purchase scheme. Current employees would
not be affected.
Required (a) Discuss the strategic, financial and ethical issues that this case presents and the
merits of the proposed share option and sale and leaseback schemes. (b) Briefly discuss
whether the sole financial objective is appropriate, with reference to the scenario
9) The Chairman and the Chief Executive Officer (CEO) of Kengai Co, a listed mining
company, are discussing whether or not the company should adopt a triple bottom line (TBL)
reporting system in order to demonstrate Kengai Co's level of sustainable development.
Kengai Co's competitors are increasingly adopting TBL reporting and the Chairman feels
that it would be beneficial to follow suit. The CEO, on the other hand, feels that pursuing
TBL reporting would be expensive and is not necessary.
Required
a) Explain what TBL reporting involves and how it would help demonstrate Kengai Co's
sustainable development. Support your explanation by including examples of proxies
that can be used to indicate the impact of the factors that would be included in a TBL
report.
b) Discuss how producing a TBL report may help Kengai Co's management focus on
improving the financial position of the company. Illustrate the discussion with
examples where appropriate.