TERM PAPER: FINANCIAL MANAGEMENT – BAC362 Question A 1. The primary financial objective of a company is stated by corporate finance theory to be the maximisation of the wealth of its shareholders, but this objective is usually replaced by the surrogate objective of maximisation of the company’s share price. Discuss how this substitution can be justified. 2. Explain why maximisation of a company’s share price is preferred as a financial objective to the maximisation of its sales. 3. Discuss the ways in which the concepts of agency theory can be used to explain the relationships that exist between the managers of a listed company and the providers of its equity finance. Your answer should include an explanation of the following terms:
i. ii. iii.
asymmetry of information; agency costs; the free-rider problem.
4. You are given the following details about ROGIM Company Ltd. Breakdown of activities by percentage of total annual company turnover:
Department stores: Clothing: Building materials: Hotels and catering: Electronics:
30% 24% 20% 16% 10%
Current share price: Average annual share price growth over the past five years:
Instructions: • This term paper covers the first three topics of the syllabus as contained in the course outline namely, Introduction to Financial Management, Time Value of Money and Valuing Financial Securities (Sources of Funds). • You are required to type your answers using Times New Roman font, size 12. • Ensure that you have your name and index number on your paper. • Endeavour to cite sources of any material you consult in doing the assignment in order to avoid plagiarising. • This paper constitutes 40 percent of your total assessment of this course. • Deadline for submission of paper is 31st May, 2020 by 11:59 pm. • Copying shall not be tolerated. Make sure you read the material and submit an independent paper. 2
Conglomerate sector average annual share price growth over the past five years: Level of gearing based on market values (debt/debt + equity) Conglomerate sector gearing level based on market values (debt/debt + equity)
9% 23% 52%
The directors of the company were given share options by its remuneration committee five years ago. In a year’s time the options will allow each director to purchase 100000 shares in the company at a price of GHc2.00. The directors’ average annual salary currently stands at GHc200,000 on a five-year rolling contract basis, while average salaries in the conglomerate sector are GHc150,000 and tend to be three-year rolling contracts. i. Using the above information to illustrate your answer, critically discuss the extent to which ROGIM Company Ltd. can be said to be suffering from the agency problem.
Discuss how the issues you have identified in part (a) can be addressed in order to reduce the agency problem.
Question B 1. Explain how the concept of the time value of money can assist a financial manager in deciding between two investment opportunities. 2. Describe the factors that influence the relative proportions of internal and external finance used in capital investment. 3. Asempa has asked you for advice about her investment portfolio. She is considering buying shares in companies listed on the recently created Alternative Investment Market by the Ghana Stock Exchange. Jojoh, a friend of Asempa, has told her she should invest only in shares that are listed on an efficient capital market as otherwise she cannot be sure she is paying a fair price. Asempa has explained to you that she is not sure what an ‘efficient’ capital market is. a. Explain to Asempa what characteristics are usually required to be present for a market to be described as efficient. b. Discuss whether the Alternative Investment Market is considered to be an efficient market. c. Discuss the extent to which research has shown capital markets to be efficient.