INSTITUTE OF CHARTERED SECRETARIES I C S A

AND ADMINISTRATORS IN ZIMBABWE INTERNATIONAL

EXAMINATION QUESTION PAPER

DATE: NOVEMBER 2014 TIME: 3 HOURS

PART: D (PROFESSIONAL PROGRAMME II)

SUBJECT: CORPORATE FINANCIAL MANAGEMENT

INSTRUCTIONS TO CANDIDATES

This paper is divided into Two sections

Candidates should answer ALL questions in Section A.

Candidates should answer any THREE questions from Section B.

MARK ALLOCATION
Question 1 in Section A carries 40 marks.
Questions in Section B carry a total of 60 marks.
Total – 100 marks

Your examination script is the property of ICSAZ and is not to be removed from the examination
venue.
 SECTION A

(This question is COMPULSORY)

QUESTION 1

(a) Chandida Private Limited is proposing a new share issue to share 100
million shares at $20 each. This would involve $8 million worth of
transaction costs. The company has just paid a dividend of $2.50 to
its ordinary shareholders, and dividends are expected to grow at 10%
pa as from the following year.
REQUIRED:

Evaluate the cost of the new equity to Chandida Private Limited. [5 marks]

(b) It has been observed that the Net Present Value (NPV) of a project is
strongly influenced by rainfall patterns in a given year. If rains in a
given year are good, the NPV will be good because of the strong
positive Cash Flows (CFs) and the converse also holds. The table
below shows the nature of the rain season, their probabilities and
expected NPVs:

Rain Season Probability NPV

Good 0.20 2 500 000
Moderate 0.60 1 200 000
Poor 0.20 500 000

REQUIRED:
Estimate the expected NPV of the project and its standard
deviation.
[10 marks]
(c) Amanda Private Limited (Zimbabwe) is contemplating on the
prospects of taking its diamond mining business to Zambia where the
political-environment appears to be conducive to such type of
business endeavours.

REQUIRED:
Examine the risks that are likely to impact on the company’s diamond
[6 marks]
business if it is taken to Zambia.

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(d) A Zimbabwean firm that exports diamonds internationally has just
signed a contract on quarterly exportation of diamonds to a South
African firm, Wellington Private Limited. The Zimbabwean exporting
firm expects to receive R800 000 in 3 months’ time for diamond
exports that it has delivered recently to Wellington Private Limited.

However, given the volatile nature of foreign currency markets, the

exporter wishes to hedge own position in Rands against the risk of a
weakening US dollar relative to the Rand.

Assume you have gathered the following financial information from

Zimbabwean and South African money and foreign exchange markets
respectively:

The spot price (foreign exchange rate) = $0.1764/R

The 3 month forward rate = $0.1754/R
The 3 month forecast spot rate = $0.1740/R

Zimbabwe’s 3 month borrowing rate = 8% pa.

Zimbabwe’s 3 month lending rate = 6% pa.
South Africa’s 3 month borrowing rate = 10% pa.
South Africa’s 3 month lending rate = 8% pa.

REQUIRED:
Demonstrate how the exporter would hedge against exchange rate
risk using both forward and money market hedges. [8 marks]

(e) Financial Theory argues that the growth and development of

economies the world over is premised on the efficiency and
effectiveness of their financial markets, as far as provision of financial
and investment opportunities to individuals, institutions,
corporations and governments is concerned.

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Corporate Financial Management: November 2014 Page 3 of 8
 REQUIRED:
Examine the implications of the Efficient Market Hypothesis (EMH) by
Fama (1952) on efficiency and effectiveness of pricing of stocks of
listed companies using both technical and fundamental analysis
techniques.
[11 marks]
[Total: 40 marks]

SECTION B
(Answer any THREE questions from this section)
QUESTION 2

The following is the Balance Sheet (Statement of Financial Position) of

Zamazama Private Limited:
$Millions
Liabilities and Equity:
10 million shares at $5 each 50
Retained Income 150
200
30% Preference Shares at $100 each 50
250
Long Term Loan at 20% pa 30
25% Debentures at $1 000 each 40
70

Current Liabilities 160

Total Liabilities and Equity 480
Total Assets of the Firm 480

During the year the company achieved Operating Earnings of $100 million.
It is also given that the tax rate facing the firm was 37.5% p.a. and finance
charges were in respect of long term liabilities only.

REQUIRED:
(a) Evaluate the expected growth rate in dividends given that the
company paid a dividend of $2 per share in the preceding period. [12 marks]

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Corporate Financial Management: November 2014 Page 4 of 8
 (b) As the Managing Director of Zamazama Private Limited, write a
report to the Board advising them on the factors the firm should
put into consideration before deciding on dividend to be paid to
shareholders.
[8 marks]
[Total: 20 marks]
QUESTION 3

(a) Mwendamberi Private Limited is considering purchasing a house by

making a deposit of $100 000 initially and then borrowing $300 000
to pay off the balance on the cost of the house. The loan amount is
expected to be settled over a period of 10 years at 20% p.a. interest
compounded monthly.

After 4 years and 3 months the bank adjusts the interest rate on the
loan to 28% p.a compounded monthly.

REQUIRED:
Compute the new amount that must be paid monthly to pay off the
loan within the agreed period of time. [10 marks]

(b) Maworesa Private Limited wants to set up a Sinking Fund to provide

$210 000 for the replacement of a machine at the end of 3 years.
The firm intends to make equal deposits at the end of every 6
months into a fund that will earn an interest of 21% p.a
compounded semi-annually.

REQUIRED:
Evaluate the size of the deposit to be made at the end of 6 months
and use it to construct a Sinking Fund Schedule for Maworesa
Limited. [10 marks]
[Total: 20 marks]

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Corporate Financial Management: November 2014 Page 5 of 8
QUESTION 4

(a) Tanakirwa Private Limited’s Capital Structure is as follows:

Ordinary Share Capital of $10 each/share = $3 500 000

15% Preference shares at $10 each = $4 000 000
20% Irredeemable Debentures at $1 000 each = $5 000 000
Retained Earnings = 12 500 000
$25 000 000

Preference shares have a market value of $12.80 and ordinary shares

have a market value of $16.40 and a dividend of $3.20 per share has
been declared on ordinary shares. The preference share dividend is
imminent. Ordinary share dividends have been growing at 11% p.a in
the past but the rate is expected to drop to 8% p.a in the future.
Debentures have a current market value of $960 and interest is due
in 5 days from today. The company faces a tax rate of 35%.

REQUIRED:
Calculate the weighted average cost of capital (WACC) facing
[12 marks]
Tanakirwa Private Limited.

(b) As Finance Director of Tanakirwa Private Limited, advise the

Management Board on the impact of gearing on WACC of the firm.
[8 marks]
[Total: 20 marks]

QUESTION 5

(a) Mushoriwa Private Limited has just received an order for 500 000 units
of a product from a customer. The probability that customer would be
able to settle the obligation when it falls due is 75%. The firm’s variable
cost ratio is 60% and the cost of short term financing facing the firm is
20%. It is also given that the customer has requested for 80 day credit
from its suppliers. If the order is accepted the firm’s debtors level will
increase to $520 000.

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Corporate Financial Management: November 2014 Page 6 of 8
 REQUIRED:
Advise the firm whether it should accept or reject the customer’s order
given that this does not affect any of the current orders in its hands. [10 marks]

(b) Assess the major functions that inventory would perform in Mushoriwa
Private Limited in the period under review. [10 marks]
[Total: 20 marks]

QUESTION 6

Paidamoyo Private Limited has been exploring opportunities to grow its

business through acquisitions of companies with a strong export base. Of
late the company has identified Tabhita Private Limited a horticultural
company as a potential acquisition target corporation.
The following financial data have been gathered from the two
corporations:

Paidamoyo Ltd Tabhita Ltd

Earnings Per Share $2.50 $40.50
Dividend Per Share $0.90 $0.75
Number of Shares 18 500 000 1 500 000
Share Price $28 $15

Tabhita Private Limited has some recent history of steady growth in both
earnings and dividends of 5% p.a. Despite this achievement it is your view
as a Financial Analyst that the company in combination with Paidamoyo
Lmited would attain synergistic benefits amounting to $37 000 000,
before both taxes and transaction costs to be borne on the markets are
put into consideration.

REQUIRED:
(a) Determine the value of Paidamoyo Limited’s share if the acquisition
is a:
(i) Cash offer to Tabhita Limited at $18.75 per share. [6 marks]
(ii) One share of Acquirer for every Two owned by the Target
Company. [6 marks]

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Corporate Financial Management: November 2014 Page 7 of 8
(b) Assess the other factors (based on the firms’ fundamentals given
above) that need to be taken into consideration before the opposed
per acquisition is made. [8 marks]
[Total: 20 marks]

“End of Examination Paper”

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