ICAN 2024 Strategic Financial Management | Mixed

You are employed by Bolade Plc ( BP), a very large printing firm with retail outlets across Nigeria. Its board is considering making an offer to buy 100% of the shares of Kenny Ltd (KL), a competitor of Bolade in Aba. KL‟s financial year end is 28 February and its most recent financial statements are summarised below: KL Income Statement for the year ended 28 February 2023 Revenue 17.3 Profit before interest and tax 5.9 Interest (0.3) Profit before taxation 5.6 Tax at 21% (1.2) Profit after taxation 4.4_ Dividends declared 1.1_ KL Statement of financial position at 28 February 2023 Non-current assets: Freehold land and buildings (original cost ₦4.1m) 3.5 Machinery (original cost ₦8.8m) 5.3 Current assets: Inventories 3.0 Receivables 0.5 Cash and bank 2.8 Current liabilities: Trade payables 3.5 Dividends 1.1 Taxation 1.2 Non-current liabilities: 10% bonds (redeemable 2031) (3.0) Equity: Ordinary shares of ₦1 each 2.1 Retained earnings 4.2 Additional Information KL‟s management had some of the company‟s assets independently revalued in January 2023. Those values are shown below: Freehold land and building 8.3 Machinery 4.1 Inventories 3.1 The average price/earnings ratio for listed business in the printing industry is 9 and the average dividend yield is 6% p.a. The cost of equity of business in the printing industry, taking account of the industry average level of capital gearing, is 14% p.a. KL‟s finance department has estimated that the company‟s pre-tax net cash inflows (after interest) for the next four trading years ending 28 February, before taking account of capital allowances, will be: Year to 2024 4.6 Year to 2025 4.3 Year to 2026 5.2 Year to 2027 5.7 KL‟s existing equipment has tax written-down value of ₦3.6 million at 28 February 2023. The equipment attracts 18% (reducing balance) tax allowances in every year of ownership by the company, except the final year. You should assume that KL will not be purchasing or disposing of any machinery in the years 2024-2027 and that it would dispose of the existing equipment on 28 February 2027 at its tax written-down value. Bolade‟s board estimates that in four years‟ time, i.e. 28 February 2027, it could, if necessary, dispose of KL for an amount equal to four times its after-tax cash flow (ignoring the effects of capital allowances and the disposal value of the equipment) for the year to 28 February 2027. Assume that the company income rate is 21% p.a.

The following draft appraisal of a proposed investment project has been prepared for the Finance Director of Keke Plc (KP) by a trainee accountant. The project is consistent with the current business operations of KP. Year 1 2 3 4 5 Sales (units/yr) 250,000 400,000 500,000 250,000 ₦000 ₦000 ₦000 ₦000 N000 Contribution 13,300 21,280 26,600 13,300 - Fixed costs (5,300) (5,618) (5,955) (6,312) - Depreciation (4,375) (4,375) (4,375) (4,375) - Interest payments (2,000) (2,000) (2,000) (2,000) - Taxable profit 1,625 9,287 14,270 613 Taxation - (488) (2,786) (4,281) (184) Profit after tax 1,625 8,799 11,484 (3,668) (184) Scrap value - - - 2,500 - After-tax cash flows 1,625 8,799 11,484 (1,168) (184) Discount at 10% 0.909 0.826 0.751 0.683 0.621 Present values 1,477 7,268 8,624 (798) (114) Net present value = (16,457,000 – 20,000,000) = ₦3,543,000 so reject the project. The following information was included with the draft investment appraisal: (1) The initial investment is ₦20 million. (2) Selling price: ₦120/unit (current price terms), selling price inflation is 5% per year. (3) Variable cost: ₦70/unit (current price terms), variable cost inflation is 4% per year. (4) Fixed overhead costs: ₦5,000,000/year (current price terms), fixed cost inflation is 6% per year. (5) ₦2,000,000/year of the fixed costs are development costs that have already been incurred and are being recovered by an annual charges to the project. (6) Investment financing is by a ₦20 million loan at a fixed interest rate of 10% per year. (7) Keke Plc can claim 25% reducing balance tax allowable depreciation on this investment and pays taxation one year in arrears at a rate of 30% per year. (8) The scrap value of machinery at the end of the four-year project is ₦2,500,000. (9) The real weighted average cost of capital of Keke is 7% per year. (10) The general rate of inflation is expected to be 4.7% per year.

Tope operates a chain of cellular telephone stores in the country. An abbreviated profit or loss account and statement of financial position of the business for the year that has just ended is as follows: Abbreviated profit or loss account for the year ended 31 May 2023 ₦‟000 Sales 6,450 Operating profit for the year 800 Interest payable (160) Net profit before taxation 640 Tax (20%) (128) Net profit after taxation 512 Dividends proposed (256) Retained profit for the year 256 Abbreviated statement of financial position as at 31 May 2023 ₦‟000 ₦‟000 Non-current assets at written down values 3,500 Current assets 1,800 Less: Current liabilities (1,100) 700 4,200 Less: long-term liabilities (2,000) 2,200 Capital and reserves ₦0.50 ordinary shares 600 Retained profit 1600 2,200 The company is expecting a surge in sales following advances in cellular telephone technology that should translate into additional operating profits of ₦180,000 per year for the foreseeable future. However, the company will need to invest ₦1,200,000 immediately in expanding the asset base of the business, if it is to achieve these additional profits. The business has approached a large supplier that already has an equity investment in the business to see whether it would be prepared to provide further funds for the business. The supplier has indicated it would be willing to provide the necessary funds by either: (i) An issue of ₦0.50 ordinary shares at a premium of ₦1.50 per share; or (ii) An issue of ₦1,200,000 10% debt at par. The Board of Directors of Tope has already announced that it will maintain the same dividend payout ratio in future years as in the past and that this policy will be unaffected by the form of finance raised.

The following information is on 3 default free bonds. Bonds Price Coupon Redemption value Maturity ₦ % ₦ Years A 105 10 100 1 B 96 4 100 2 C 98 6 100 3

Linko Plc is a Uk-based company. It supplies medical equipment to the USA and Europe. It also buys some basic raw materials from USA. In a typical financial year Linko has net imports of 8 million dollars from USA. This is expected to continue for the next six years. The company’s cost of capital is 10% per year. Assume that cash flows occur at the year end. Ignore taxation.