UNIVERSITY OF GHANA

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ND
2 SEMESTER EXAMINATIONS: 2019/2020

BACHELOR OF SCIENCE/BACHELOR OF ARTS IN ADMINISTRATION

FINC 302: BUSINESS FINANCE

(3 CREDITS)

TIME ALLOWED: 24 Hours

INSTRUCTIONS: ATTEMPT ALL THE QUESTIONS FOR 30 MARKS

Start Date: 14/6/2020; Submission Date: 6pm 15/6/2020

TIME ALLOWED: 24 Hours

INSTRUCTIONS: ATTEMPT ALL QUESTIONS IN EITHER SECTIONS

A, B OR C

SUBMIT YOUR HANDWRITTEN AND SCANNED OR TYPED ANSWERS

TO YOUR RESPECIVE LECTURERS NAMELY:

Godfred A. Bokpin, gabokpin2@gmail.com

Vera Fiador, vfiador@ug.edu.gh

Lordina Amoah, lamoahpro@gmail.com

Adom Frimpong, professoradomfrimpong@gmail.com

SECTION A (30 Marks)

Examiners: Godfred A. Bokpin, Adom Frimpong, Vera Fiador & Lordina Amoah, Page 1
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Question:
Consider a project to supply your church with 55,000 gallons of hand sanitizer
annually for church services. You estimate that you will need an initial Gh
¢4,200,000 in terms of investment to get the project started. The project will last
for 5 years.
The project will bring in annual cash flows of Gh¢1,375,000. It also estimates a
salvage value of Gh¢300,000 after dismantling costs.
Your cost of capital is 13 percent. Assume no taxes or depreciation.
Required:
a) What is the NPV of the sanitizer project? Should you pursue this
project? (8 Marks)

b) Suppose you believe that there is a best case scenario where initial
investment could be 15% lower with salvage value and revenue being
10% higher, what would be the NPV under this scenario? (6
Marks)
c) In the worst case scenario, you expect annual cash inflows to be 10%
lower, salvage value to be 12% lower and initial investment to be 10%
higher. Calculate the NPV under this worst case scenario. Would you still
pursue the project? (6 Marks)
d) You just received additional information that suggests that your base case
(answer to a), best case (b) and worst case (c) scenarios have probabilities
of 0.35, 0.35 and 0.30 respectively. What will be the expected NPV of
the sanitizer project. What about the standard deviation of the sanitizer
project? Do you think the project is still viable?
(10
Marks)

Examiners: Godfred A. Bokpin, Adom Frimpong, Vera Fiador & Lordina Amoah, Page 2
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 SECTION B
Answer all questions in this section for 30 marks

A. As the financial manager of Wilmore Company Limited, with a passion to

boost employment creation through intraregional tourism in Ghana, you
have acquired a land at Ho to put up an exquisite amusement park that
features a number of attractions including games, pools, gardens, rides etc.
The project will cost a total of GH₵100,000. The following cash flows are
expected from the project. The beta of the project is 1.5 and the market
return is 15%. The risk-free rate of return is 8%.
Year ₵
0 (100,000)
1 20,000
2 25,000
3 32,000
4 35,000

i. Using the CAPM approach, what is the cost of equity on this project?
[2 marks]
ii. Wilmore Company Limited is a levered entity with percentage of debt
out of total capital being 40%. If the interest rate on a bank loan is 10%,
the tax rate is 20%, and the cost of equity is as computed in (a), what will
be the after tax cost of debt? [2 mark]
iii. What will be the weighted average cost of capital (WACC)? [2 mark]
iv. Using the WACC computed in (c), what will be the NPV of the
investment? ` [3 marks]
v. Compute the IRR for the project? [3 marks]

Examiners: Godfred A. Bokpin, Adom Frimpong, Vera Fiador & Lordina Amoah, Page 3
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 vi. What will be your overall advice concerning viability of the project?

[2 marks]

B. Mr. Norman and Mr. Foster are both investors looking to buy financial
assets. Mr. Norman prefers assets with the lowest prices while Mr. Foster
prefers assets on the financial market with higher prices. Each of them
currently has GHC 1,000 to invest and needs your assistance to know which
asset to buy to suit their preference. The following information provides
details of investment options.
a. Asset A is a bond with a coupon rate of 10% and pays semi-annual
coupons. The par value is GHC 1,000, and the bond has 5 years to
maturity. The yield to maturity is 11%.
b. Asset B is a stock whose dividend is expected to increase by 20% in
one year and by 15% in two years. After that, dividends will increase
at a rate of 5% per year indefinitely. The last dividend was GHC 100
and the required return is 20%.
Which asset will Mr. Norman and Mr. Foster invest in? [8 marks]

C. In the 2020 accounting year, investors made a number observations in terms

of certain decisions some corporations were taking:
(i) The board of directors of some manufacturing and services companies
decided to pay stock dividends instead of cash dividends;
(ii) On the other hand, the board of directors of majority of companies
within the ICT industry decided to pay special cash dividends;
(iii) It was also observed that some the management of some companies had
decided to repurchase shares while others were engaging in stock splits.

What could be the reason for these three decisions and choice of dividend
payments by the boards of these companies and what will be the effect of
such decisions on the outstanding number of shares and the share prices of
these companies? [8
marks]

Examiners: Godfred A. Bokpin, Adom Frimpong, Vera Fiador & Lordina Amoah, Page 4
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Examiners: Godfred A. Bokpin, Adom Frimpong, Vera Fiador & Lordina Amoah, Page 5
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 SECTION C

Attempt Question 1 for 30 Marks

Question 1

An investor is considering starting a new business whilst working with a

local government as Accountant. The company would require GHS 500,000
of assets, and it would be financed entirely with common stock. The investor
will go forward only if he thinks the firm can provide a 15.0 percent return
on the invested capital, which means that the firm must have an ROE of 15.0
percent. After operating the business for 5 years, he realized the importance
of debt and tax deductibility that comes with it. He then decided to alter the
capital structure whilst expanding the size of the business. His total assets
came to GHS 647m financed as follows:
Market value of Debt= GHS 194m with 11%
Market value of Equity= GHS 453m with expected return of 17%

Just as he was about obtaining an additional loan in 2020, Covid-19 and its
containment measures (such as social distancing, stay at home etc) affected
his business which operated more with human interaction. The three-week
partial lockdown has affected the going concern of his business. Government
has set up the Coronavirus Alleviation Programme (CAP) with seed money
of GHS 1 billion. An amount of GHS 600 million of this money is to be
disbursed to vulnerable firms and GHS 400m to vulnerable households. The
government also announced free water for three months (April to June 2020)
to all citizens consistent with the health protocols of washing hands as often
as possible under running water though one-third of the African population
cannot wash their hands simply because of lack of running water. For the
three months, electricity has been zero-rated for lifeline consumers (from 0-
50 kilowatt-hours a month consumption) whilst all other categories of
consumers enjoy a 50% subsidy. Given the enhanced exposure of frontline
workers as a result of the pandemic, the government also offered tax
exemptions amounting to 50% of their basic salary for the three months
translating to fiscal loses of GHS 288.6m including additional allowances
for frontline health personnel covering March, April, May, and June for the
year 2020 (amounting to GHS 51 million). But the Accountant has

Examiners: Godfred A. Bokpin, Adom Frimpong, Vera Fiador & Lordina Amoah, Page 6
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 complained for his exclusion from the list of beneficiaries. Bank of Ghana
(BoG) also responded by reducing the policy rate by 150 basis points as well as
reducing the Primary Reserve Requirement from 10% to 8%. His bank loan
is indexed to the primary reserve requirement and varies accordingly. Given
the above and your own understanding of recent development with respect to
Covid-19: Attempt the following questions (you are free to make reasonable
assumptions)

A) How much net income must be expected to warrant starting the

business? (3 Marks)
B) Estimate the Weighted Average Cost of Capital (WACC) of the
business before and after Bank of Ghana’s Covid-19 intervention and
interpret your results. Assume a tax rate of 25% (10 Marks)
C) Ascertain the minimum profit the business must make in order to
satisfy providers of capital before and after BoG’s Covid-19
intervention.
i. (5 Marks)
D) Using your understanding of risk and returns, is the complaint of his
exclusion from the tax rebate justified (3 Marks)
E) Discuss how government’s Covid-19 fiscal stimulus would benefit his
business and how he can take advantage of them. (8 Marks)

Examiners: Godfred A. Bokpin, Adom Frimpong, Vera Fiador & Lordina Amoah, Page 7
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