INSTITUTE OF CHARTERED SECRETARIES

AND ADMINISTRATORS IN ZIMBABWE

EXAMINATION QUESTION PAPER

SUBJECT: CORPORATE FINANCIAL MANAGEMENT

PART: D (PROFESSIONAL PROGRAMME II)

DATE: AUGUST 2018 TIME: 13:15 to 16:30 HOURS

DURATION: 3 hours and 15 minutes reading time

INSTRUCTIONS TO CANDIDATES

Answer any five 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

a) Discuss the pros and cons that investors would draw from listing of their
companies on the Securities Exchange. (8 marks)
b) Examine the objectives of the management of a firm with respect to the
needs of the shareholders. (12 marks)
[Total: 20 marks]

QUESTION 2

Nyirenda Limited is making a 1 for 3 rights issue with each new share issued
costing $2.00. The current market share price of the share is $3.00.

REQUIRED

a) Calculate the ex-rights price of the firm. (5 marks)

b) Evaluate the market value of the firm’s shares on the basis of a price-
earnings (P/E) ratio of 10 assuming that the money invested would yield
the same return as the existing shares or the earnings would increase to
15% of the market value of the share. [Take the number of shares of the
company in issue to be 3 million and total dividends to be $900 000].
Comment on your findings. (15 marks)
[Total: 20 marks]

QUESTION 3

Two firms, Levered and Unlevered Limited are identical and equally
capitalized such that the Levered firm has $40 million debt at an interest rate
of 7.5%. The two firms are generating operating income, that is earnings
before interest and tax (EBIT) of $9 000 000 on an annual basis. Stockholders
of both firms are facing the same required rate of return of 10%, which means
that the cost of equity is assumed constant regardless of the nature of the
capital structure facing the firm.

REQUIRED:
a) Determine the net income that would accrue to an investor who owns a
10% stake in the Levered firm. (14 marks)
b) Comment on the potential effects of the net income in (a) on the value of
the stock of the investor if they take advantage of arbitrage. (6 marks)
[Total: 20 marks]

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Corporate Financial Management: August 2018 Page 2 of 4
QUESTION 4

The following financial data represent the Financial Statements of Dunga

Limited as at 31 July for the years 2016 and 2017.

2016 2017
$000 $000 $000 $000
Fixed Assets 80 000 120 000
Current Assets
Stock 20 000 40 000
Work in Progress (WIP) 20 000 50 000
Debtors 50 000 80 000
Cash 5 000 0
95 000 170 000
Current Liabilities
Creditors 45 000 118 000
Bank Overdraft 20 000 60 000
Total Current Liabilities 65 000 178 000
Net Current Assets 30 000 (8 000)
Total Net Assets 110 000 112 000
Financed by:
Share Capital 100 000 100 000
Profit & Loss Account 10 000 12 000
Total 110 000 112 000
Sales 500 000 1 000 000
Cost of Sales 400 000 900 000
Gross Profit 100 000 100 000
Net Profit _30 000 __2 000

REQUIRED:
a) Evaluate the overall performance of the firm over the two year period
based on the state of its Financial Statements above. (12 marks)
b) Analyze the shareholders’ stake in the firm over the two year period and
the methods that could be used to relieve the situation. (8 marks)
[Total 20 marks]

QUESTION 5
Anna Limited wishes to make an offer to acquire the shares of Bella Limited.
The financial data below represent the fundamentals of the firms as at 31 July
2018:

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Corporate Financial Management: August 2018 Page 3 of 4
Financial Variable Anna Limited Bella Limited
Current dividend per share ($) 1.20 0.30
Fair rate of return (%) 20 15
Estimated future growth rate (%) 6 5
Number of issued shares (million) 10 4

REQUIRED:
a) Calculate the number of shares in Anna Limited to be issued in order to
acquire 100 000 shares in Bella Limited. (10 marks)
b) Examine the conditions under which the free cash flows model (FCFM)
would be preferred to the accounting rate of return model used above. (10 marks)
[Total: 20 marks]

QUESTION 6

A USA computer company has a wholly owned British subsidiary firm that
manufactures and sells personal computers in the United Kingdom (UK)
markets. The subsidiary imports microprocessors from Intel which sells them
for $512.00 per unit.
The following is additional information related to the company:
- The current exchange rate is $1.60/£.
- The subsidiary hires British workers and sources all inputs locally.
- The income tax in the UK is 50%.
- The expected computer sales are 50 000 units per annum.
- The selling price is £1 000.
- The unit variable cost is £650, made up of imported microprocessor and
£330 for other locally sourced inputs.
- The fixed overhead costs amount to £4 million per annum
- The total annual depreciation is £1 million.

REQUIRED:

a) Determine the projected operating cash flows of the US computer

company’s subsidiary firm in the UK assuming that the exchange rate falls
from $1.60/£ to $1.28/£. (15 marks)
b) Comment on the impact of the depreciation of the pound in (a) above on
the cash flows of the firm. (5 marks)
[Total: 20 marks]

“End of Examination Question Paper”

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