INSTITUTE OF CHARTERED SECRETARIES I C S A

AND ADMINISTRATORS IN ZIMBABWE INTERNATIONAL

EXAMINATION QUESTION PAPER

SUBJECT: CORPORATE FINANCIAL MANAGEMENT

PART: D (PROFESSIONAL PROGRAMME II)

DATE: MAY 2016 TIME: 13:15 to 16:30 HOURS

DURATION: 3 hours and 15 minutes reading time

INSTRUCTIONS TO CANDIDATES

Candidates should answer any FIVE (5) questions.

MARK ALLOCATION
Each question carries 20 marks.
Total – 100 marks

The examination script is the property of ICSAZ and is not to be removed from the examination
venue.
QUESTION 1

Your client, Mr. Njainjai is considering purchasing the consultancy practice

of Mr. Njonzi, whose latest balance sheet as on 31 December 2010 is as
follows:
$000 $000
Fixed assets:
Freehold premises, at cost 50
Office equipment at cost 6.4
Less depreciation 1.4 5
Motor car at cost 7.6
Less depreciation 1.6 6
Current assets:
Debtors 8
Current liabilities:
Accrued expenses 8
Bank overdraft (6) 2
63
Capital Account:
Balance at 1 January 2010 65
Net profit for the year 18
Drawings (20)
Balance at 31 December 2010 63

Mr. Njainjai estimates that the current values of Mr. Njonzi’s fixed assets
are:
Replacement cost Realisable value
$ $
Freehold premises 80,000 76,000
Office equipment 7,600 2,000
Motor car 4,600 3,000

In addition to the fixed assets, Mr. Njainjai would take over the current
assets and liabilities. He believes that $1,000 of the debtors is
irrecoverable.

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Corporate Financial Management: May 2016 Page 2 of 8
Mr. Njonzi’s net profits for the past years have been as follows:
$
Year ended 31 December 2006 19,000
2007 15,800
2008 18,600
2009 16,400
2010 18,200

Mr. Njainjai has recently inherited $200,000, which is earning an annual

rate of interest of 10%. If he buys Mr. Njonzi’s business he will pay for it
out of this inheritance. Mr. Njainjai is employed at an annual salary of
$8,000, and would probably relinquish his employment in order to run the
business.

REQUIRED:
Draft a report to Mr. Njainjai advising him, on the bases of the above
information, how much he might offer for Mr. Njonzi’s business- making
use of the Asset basis and the Earning basis methods of valuation as well as
additional information which you think would be useful before a final
decision is made. (20 marks)

QUESTION 2

The following are the Balance Sheets (Statements of Financial Position) of

Zama Private Limited for the years ended 31 December 2014 and 2015
respectively:
$Millions $Millions
Equity 2014 2015
10 Million Ordinary Shares at $25 each 250 250
Retained Income 30 50
280 300
30%, 8 Million Preference Shares at $12.50 each 100 100
Total Equity and Retained Income 380 400

Liabilities
Long Term Loan at 20% pa 30 30
16% Debentures at $1 000 each 50 50
Sub Total 460 480
Current Liabilities 100 160
Total Liabilities and Equity 560 640
Total Assets of the Firm 560 640

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Corporate Financial Management: May 2016 Page 3 of 8
During the year 2014 the company achieved operating earnings of $200
million and in 2015 the operating earnings were $250 million. It is also
given that the corporate tax rate faced by the firm in the two year period
was 37.5%. The finance charges levied on the company were in respect of
long term liabilities, namely loan and debentures only.

REQUIRED:
(a) Compute the expected growth rates in dividends given that the
company paid a dividend of $4 per share in 2014 and $5 per share in
2015. Appraise the growth rates of the firm in the two year period. (8 marks)

(b) Calculate the weighted average cost of capital (WACC) of the firm
using the capital market values for 2015. (5 marks)

(c) As the Finance Director of Zama Private Limited, write a report to the
Board advising them on the factors the firm should put into
consideration before deciding on the dividend to be paid to
shareholders in any given financial year. (7 marks)
[Total: 20 marks]
QUESTION 3

TTS Private Limited is a coal mining business in Zimbabwe. The company

has grown a sizable market share in the industry of operation over the
past 10 years of operation and intends to continue to expand its coal
mining business. One additional set of equipment however is needed in
order to improve the company’s coal mining business operations and
revenues. There are 2 sets of equipment that are available on the market
from which the firm can choose. The following table summarises the costs
and cash flows each set would require and generate per annum
respectively:
Year Equipment A ($) Equipment B ($)
0 -120 000 -90 000
1 67 500 67 500
2 75 000 90 000
3 90 000
Cost of Capital 30% 30%
IRR 39.54% 44.30%
NPV 17 267 15 178

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It is expected that for comparison purposes, equipment A should be
repeated twice and equipment B three times (Lowest Common Multiple
Approach, LCM). However each time each set of equipment is repeated,
the initial capital investment will increase by 10% and each annual cash
flow by 20% for both sets of equipment.

REQUIRED:
Determine the set of equipment that the firm should purchase based on
the Lowest Common Multiple (LCM) capital appraisal technique. Appraise
your answers. (20 marks)

QUESTION 4

The following financial information has been extracted from the

Comprehensive Statement of Income of Text Limited for the year ending
31 December 2015:
$ 000
Sales 24 000
Operating Costs 15 500
EBIT 8 500
Interest on Loan 2 400
Earnings Before Tax 6 100
Corporate Taxation (37.5%) 2 440
Net After Tax Income 3 660

The cost of equity of an equivalent ungeared firm in the same risk class as
Text Limited is 25%. It is also given that the firm faces a corporate tax rate
of 37.5% and a yield on debt of 16% per annum.

REQUIRED:
(a) Compute the following:
(i) The value of the firm according to MM proposition 1 without
taxes. (5 marks)
(ii) Cost of Equity of the firm according to MM Proposition 2
adjusted for corporate taxes. (5 marks)

(b) Comment on the implications of the MM theory to the value of Text

Private Limited. (10 marks)

[Total: 20 marks]

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Corporate Financial Management: May 2016 Page 5 of 8
QUESTION 5

Matshuba Private Limited is a Zimbabwean mining firm that is

contemplating making a 4 year capital investment in Botswana. The firm is
set to undertake diamond mining in Botswana that will result in the
following projected foreign currency operating cash flows (in Pula, P 000):

Table 5.1 P 000 P 000 P 000 P 000

Years 1 2 3 4
Revenues (P) 6 000 6 900 8 000 9 200
Costs (P) 5 000 5 500 6 450 7 360
Salvage (P) 400

Table 5.2
Year 1 2 3 4 5
Exchange 0.120 0.124 0.126 0.128 0.130
Rate$/Pula

For foreign investment to take place, the Botswana government would

require that foreign players must have the following assets in Botswana:
 Old building P 500 000
 Equipment P 900 000 + Installation of P 100 000
 Working capital P 300 000

It is also given that cash flows generated in Botswana by foreign firms

should be exposed to the following charges:
 A corporate tax rate in foreign land of 35%.
 A dividend and management fess withholding tax rate of 15%.

To encourage foreign investment in the country, the Botswana

government offers the following incentives to foreign firms:
 A 40% investment allowance rate for new equipment bought in
host country.
 A 20% allowance rate for old buildings bought for investment
purposes.

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Corporate Financial Management: May 2016 Page 6 of 8
Dividends and royalties can be fully remitted back to the country of origin
by the foreign investing firm.
A management fee of 2% of annual sales, not included in operating
expenses will be levied on all operating cash flows.
The foreign project to be undertaken is to be financed by 60% equity, 40%
debt.
 Debt is acquired in Botswana at a rate of interest of 20% per
annum.
 The principal debt is to be paid at the end of the life of the project
while interest is to be paid yearly for 4 years.
 The cost of capital for the firm will be 24% per annum but the
company’s policy is to assess all foreign projects at a high cost of
capital of 28% per annum.
 Remittances into Zimbabwe will be subjected to the following
taxes: dividends 20% and royalties, 35%.

REQUIRED:
(a) Determine some of the motives that firms engaging in international
businesses would put into consideration before commencing foreign
investments. (5 marks)

(b) Evaluate the viability of the proposed foreign project based on the
Zimbabwean domestic currency terms. Appraise your answer.
(15 marks)
[Total: 20 marks]

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Corporate Financial Management: May 2016 Page 7 of 8
QUESTION 6

(a) The following Financial Information was extracted from the books of
Bandamba Private Limited for the years ending 31 December 2014 and
2015:

31-12-14 31-12-15
$(000) $(000)
Sales 4 000 5 000
Purchases of raw materials 1 200 2 000
Raw materials consumed 1 000 1 500
Cost of goods manufactured 2 000 3 000
Cost of Sales 1 900 2 900
Debtors 600 900
Creditors 200 400
Stock
Raw Materials 100 70
Work in progress 70 130
Finished Goods 30 80

REQUIRED:
Compute the Cash Operating Cycles for the company for the 2 years.
(13 marks)
Interpret your findings.

(b) Several views are taken on the effect of gearing on weighted average
cost of capital. The two main positions are :

 Traditional view (or net income view)

 Modigliani and Miller view (or net operating income view)

REQUIRED:
Explain the difference between the two views.
(7 marks)
[Total: 20 marks]

“End of Examination Question Paper”

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