Reference no: EM132363225
Advanced Financial Management
Aim(s)
The module is designed to build on the finance related knowledge and skills acquired by students in their earlier studies, particularly those acquired via study of Financial Management in their second year. It will also provide a strategic understanding of financial management policy and practices.
The module complements other 3rd year modules in the finance area, particularly investment management and taxation. It does more than any other module to integrate various aspects of students' accounting studies from the viewpoint of the finance director or treasurer. A pass in this module provides exemption from the ACCA paper F9.
Learning Outcomes
On successful completion of the module. the student should be able to
1. Apply relevant knowledge and skills in making decisions relating to investment, financing, capital structure & dividend policies
2. Estimate costs of various sources of medium & long term finance & a company's WACC
3. Calculate and interpret investment ratios & other performance measures to facilitate the valuation of shares/businesses in the context of mergers and takeovers
4. Apply corporate risk management techniques, including the management of exchange rate risk.
Indicative Content
Capital investment appraisal: Calculating NPVs allowing for both inflation and taxation, Sensitivity analysis. Specific investment decisions - lease or buy, asset replacement, single-period capital rationing.
Corporate dividend policy: theories & practice.
Cost of capital: Calculating cost of equity using both DGM& CAPM, debt (irredeemable, redeemable, convertible and preference shares)&a company's WACC; calculating a project-specific cost of capital.
Optimal capital structure theories: Discussion of traditional view vs MM pre/post-tax theories and practice.
Assessment Details
This Coursework comprises 30% of the total assessments marks. This will develop the following skills:
Analytical skills. The analysis ratios enable the students to analyse and evaluate the performance of business. This skill will eventually help them evaluate options necessary to make decisions in the workplace.
In addition, the assessment will test the following learning outcomes:
1. Apply relevant knowledge and skills in making decisions relating to investment, financing, capital structure & dividend policies
2. Calculate and interpret investment ratios & other performance measures to facilitate the valuation of shares/businesses in the context of mergers and takeovers
Assessment Details
This will develop the following skills:
Analytical skills. The analysis ratios enable the students to analyse and evaluate the performance of business. This skill will eventually help them evaluate options necessary to make decisions in the workplace.
In addition, the assessment will test the following learning outcomes:
1. Apply relevant knowledge and skills in making decisions relating to investment, financing, capital structure & dividend policies
2. Calculate and interpret investment ratios & other performance measures to facilitate the valuation of shares/businesses in the context of mergers and takeovers
Assessment Task
a) You are the newly employed Finance Director of Gala Gold Mining Ltd (GGML), a fast growing Oman mining company. The ordinary shares of GGML are listed on the Oman Security Market. The company issued two million fresh shares in an Initial Public Offer (IPO) to meet the minimum public shareholding requirement of the Market. In the prospectus accompanying the !PO, the company proposed a stable earnings pay-out ratio of 20%.
It has been one year since the listing of GGML's ordinary shares. At the first post-listing annual general meeting, which was held last week, the directors recommended that the company retains the entire profit earned in its first year as a public company to help finance profitable mining opportunities in the Western part of Sohar. This 100% earnings retention proposal was rejected by the shareholders, and the directors have promised to reconsider the issue and recommend some dividends.
The directors would be meeting in the coming month to discuss the matter with the hope of developing a sustainable dividend policy for the next three years. You are expected to make a presentation on the company's dividend capacity at the meeting.
You have gathered relevant extracts from the financial results of the past financial year (i.e. financial year ending June 2018) and expected annual changes in the values over the next three years (i.e. financial years ending June 2019, 2020 and 2021) presented in the Table below:
OMR 'm'
Earnings before interest and tax 494.0 20.0%
Interest expense (40.0) -10.0%
Net income before tax 454.0
Tax (158.9)
Net income for the year 295.1
Depreciation charges 100.0 8.0%
Capital expenditure 300.0 15.0%
Proceeds from sale of equipment 30.0 10.0%
Net working capital needs 75.0 10.0%
Net debt repayment 20.0 Same repayment
Required:
i) Advise the directors on THREE factors they should consider in developing an appropriate dividend policy for GGML.
ii) Calculate the maximum dividends GGML can pay for the past financial year, and estimate its dividend capacity for the next three years. Recommend an appro date ratio for the coming three financial years.
b) KK Chemicals Ltd, an Accra-based manufacturer of paints, sells its products only in Sohar. Currently, the company wants to expand into other countries. The directors are considering two options: set up its own subsidiary company to manufacture and sell the products or license a company based in the host country to manufacture and sell the products.
Required:
i) Advise the directors on potential advantages and disadvantages to KK Chemicals of setting up its own subsidiary company to handle production and sale in the host country as against licensing a company in the host country to do that.
ii) Suppose KK Chemicals elects to set up a subsidiary in the host country. Suggest to the directors TWO ways of dealing with the risk of blocked funds.