BOTSWANA ACCOUNTANCY COLLEGE

SCHOOL OF BUSINESS AND LEISURE

BACHELOR OF ARTS IN ACCOUNTING AND FINANCE

LEVEL 6B

COURSEWORK -FINANCIAL MANAGEMNT ISSUES

Exam TITLE: FINANCIAL MANAGEMENT

COURSE CODE: AAF 306

SUBMITTED TO: MUNYARADZI NYANDORO

SUBMITTED BY: CHIEDZA ANTONATTE MARIME

NAME: CHIEDZA

REGISTRATION NUMBER: AF19-046

DUE DATE: 7 MAy 2021, 10AM

WORD COUNT:
MARK ……96/100…………………
Contents
QUESTION 1A.............................................................................................................................................3
QUESTION 1B..............................................................................................................................................5
QUESTION 2................................................................................................................................................7
QUESTION 2B..............................................................................................................................................9
QUESTION 2C............................................................................................................................................10
SECTION B.................................................................................................................................................11
QUESTION 5A............................................................................................................................................11
QUESTION 5B............................................................................................................................................12
QUESTION 5C............................................................................................................................................13
QUESTION 6A............................................................................................................................................14
QUESTION 6B............................................................................................................................................15
QUESTION 6C............................................................................................................................................16

Year 0 1 2 3 4 5

Sales revenue 1308750 2 817 257 7 907 865 5 443 584

Costs 523 500 1 096 209 2 869 327 2 102 930
Net Operating cash
Flow 785 250 1 721 048 5 038 538 3 340 654

Capital Allowance 500 000 375 000 281 250 843 750

Net taxable cashflow

285 250 1346048 4757288 2496904

Taxation 85 575 403814 1427186 749071

Cashflow after tax 285 250 1260473 4353474 1069718
Add back capital
allowance 500 000 375 000 281 250 843 750

capital (2000 000)

Working capital (130875) (150851) (509061) 246429 544358
Net cashflows (2 130875) 634399 1 126412 4 881153 2 457826 749071
 Discount factor 1 0.893 0.797 0.712 0.636 0.567

Present Values (2 130875) 566518 897750 3475381 1563177 (424723)

QUESTION 1A

Net Present Value = $3 947 220 hence the investment project is accepted as it
will increase the shareholders’ value OR wealth

Please note that for workings turn to page 2.

WORKINGS
SALES REVENUE:

YEAR
1. 1 250 000*1.047=1 308 750
2. 2 570 000*1.047^2=2 817 257
3. 6 890 000*1.047^3=7 907 865
4. 4 530 000*1.047^4=5 443 584

COSTS:
Year 1 500 000*1.047 523 500
Year 2 1 000 000*1.047^2 1 096 209
Year 3 2 500 000*1.047^3 2 869 327
Year 4 1 750 000*1.047^4 2 102 930
 WORKING CAPITAL
timing 0 1 2 3 4
Revenue 1308750 2817257 7907865 5443584
Working 130875 281726 790787 544358
capital
Incremental 130875 150851 509061 246429 544358
cashflow

CAPITAL ALLOWANCE

YEAR COST/WDV COST ALLOWANCE TAX SAVINGS 30% YEAR OF TAX

25% SAVING
1 2000000 500000 150000 2
2 1500000 375000 112 500 3
3 1125000 281250 84 375 4
4 843750 843750 253 125 5

QUESTION 1B
They are four ways director’s ca be encouraged to achieve the objective of
maximization of shareholder wealth, thus regulations, stock exchange listing, corporate
governance codes best practice, performance related pay and divergency objectives.
The directors of Choice co can impose regulatory requirements by corporate
governance codes of practice and share listing rules. These codes are like Botswana
corporate governance code, which pursue to mitigate the corporate risk and improve its
accountability. This means the directors will be responsible for identifying, assessing,
and managing of risk in the business. Thereby maximizing shareholders wealth
On the aspect of stock market listing regulations, they can give directors responsibilities
to manage corporates in a way that encourage directors to achieve the objectives of
maximization of shareholder wealth. For instance, listing laws compel corporate to
announce its financial statements regularly. Moreover, it compels it to provide the
details on directorial incentives and announce the details on corporate social
responsibility and corporate governance.
In addition to that, directors can be encouraged by managerial reward schemes like
share option schemes and performance related pay. This will increase goals between
shareholders and directors equivalently.

Performance-related pay joins portion of the compensation of executives to a few

angles of corporate execution, such as levels of benefit or profit per share. In any case,
it is not simple to choose a highlight of corporate execution that cannot be effectively
inclined by the plans of executives, conspicuous to the probability of managers affecting
corporate affairs for self-interest instead of the good thing about shareholders, for
occasion, whereas dismissing the longer-term execution whereas centering of brief
term.

Looking on the aspect of Share option schemes, it brings about the strong jointly goals
of shareholders and directors in a way that their interest in the corporate will become
the same. Moreover, directors can buy shares at a specified price on a specified future
date, this is to encourage them to make decisions which wield a higher pressure on
share prices.

Regrettably, this may lead to directors being rewarded for poor performance because of
a general rise in market prices, and also not being rewarded for good performance as a
result of a general decrease in share prices. Irrespective of its negative impact it can
lead to an ethos of performance enhancement hence it can bring continuing benefit to
stakeholders.
Looking at dissimilarity destinations, the essential reason for it is for partition of
proprietorship and control in enterprises because it permits chiefs to take after
objectives more coherent with them possess self -interface as long as they fulfill
shareholders sufficiently.  
QUESTION 2
cost of equity
growth percentage

( )
( 0.25 )
36,3
= −1
30.9
= 1·041 – 1 = 0·041
=4·1% per year
dividend growth model:
Ke = = Do. (1 + g) + g
Po

Ke=0 ·041+
[ 36 · 3 x 1· 041
470−36.3 ]
= 0·041 + 0·07940
= 0.1204
= 12%
Cost of preference shares
since preference shares are not redeemable:

Kp=100∗
[ 0 · 04 x 100
40 ]
kp = 10%
Cost of debt of bonds
annual after-tax interest = 7 x 0·7
= $4·9 per bond.

Year Cashflow $ 5%DF PV$ 4%DF PV$

0 Market price (104.50) 1.000 (104.50) 1.000 (104.50
1-6 Interest 4.9 5.076 24.87 5.242 25.69
6 Redemption 105 0.746 78.33 0.790 82.95
1.30 4.14
After-tax cost of debt =4 + [ ( 5 – 4 ) x 4 ·14
4 · 14+ 1· 30 ]
= 4 + 0·76
= 4·8%
Cost of debt of bank loan
Kbl=4% x 0·7
= 2·8% per year.
ordinary shares issued= 4,000,000/0·5
= 8 000 000 shares
Equity:8000000×4,337 34 696 000
Preference shares:3000000×0.4 1 200 000
Redeemable bonds: 3000000 ×
104.50
100 ( ) 3 135 000

Bank loan (book value used) 1 000 000

Total Market value 40 031 000

WACC calculation

[ ( 0.12 x 34,696 ) + ( 0.10 x 1,200 ) + ( 0. 048 x 3,135 ) + ( 0.028 x 1,000 ) ]

40 031
= 11%
QUESTION 2B
This is because we pay out interest on debt before paying dividends on shares.
Therefore, the debt holders are taking less risk than equity holders and so expect less
return.

The fetched of value is the return required by standard shareholders to compensate

them for the chance related with their value venture. That is their venture within the
standard offers of a company. In case the chance of a speculation increments, the
return anticipated by the financial specialist too increments. In case the hazard of a
company increments, subsequently, its fetched of value too increases.

The risk that shareholders face is more than the risk attracted by debt holders. This is
because during the liquidation of the company the claims of creditors are established in
determining the risk as debt holders should be paid before the owners hence the cost of
equity is therefore greater than the cost of debt. Also, debt is normally secured so again
less risk is taken.

Dividends to ordinary shareholders are paid after the Interest on debt finance, so the
risk incurred by ordinary shareholders is more than the risk faced by debt holders, since
the inevitability of reimbursing interest may mean that dividends must be lowered.
QUESTION 2C
The company ought to be raising modern fund within the same extents to those raised
within the past. Subsequently, the money related hazard of a venture will be the same
as the financial risk right now confronted by a company in the event that obligation and
value are raised within the same extents as of now utilized, as a way of securing the
existing capital structure.

The commerce chance of a speculation venture will be the same as current trade
operations in case the extend is an extension of existing trade operations, and on the off
chance that it is little in comparison with current commerce operations. In the event that
usually the case, existing suppliers of back will not alter their current required rates of
return. On the off chance that these conditions are not met, a project-specific markdown
rate ought to be calculated, for case by utilizing the capital resource estimating model.

The weighted normal fetched of capital (WACC) is the normal return required by current
suppliers of back. The WACC in this manner reflects the current chance of a company’s
commerce operations (commerce hazard) and way in which the company is as of now
financed (budgetary risk).

Where the capital structure is changed by back raised for a venture, it may be suitable
to utilize the minimal taken a toll of capital instead of the WACC. And the amount fund
raised must be moderately little compared to the measure of the company as a whole
SECTION B
QUESTION 5A
1. Variables to be considered in deciding the ideal levels of cash to be held by the
company are:
The estimates of long run cash streams and surges of the company and the productivity
with which money streams of the company are overseen in this way exchanges require
for cash. The company must be considered why it must be hold and what does it need
to do with it is it to adjust brief term cashflows and surges?
In expansion, the company must consider the dubious occasions that will require cash.
The company may require cash to cover or meet unforeseen requests and unexpected
possibilities in this way prudent thought process. Unforeseen costs, such as restorative
or car repair bills, frequently require prompt installment. Subsequently, since of this the
company ought to consider these costs.
Lastly the company ought to take into thought its resistance of hazard or hazard
craving. This calculates falls beneath theoretical thought process, whereby the company
require cash for venture purposes. The theoretical thought process for requesting cash
arises in situations where holding money is perceived to be less risky than the
alternative of lending the money or investing it in some other asset. Henceforth, this
means that the issue of risk must be considered.
QUESTION 5B
The key elements of a trade receivables policy are credit analysis, credit control and
receivables collection.
Credit analysis
When giving credit, a corporate is obliged, to mull over that, it'll be uncovered to the
chance like delay, installment and. terrible obligations. To relieve this, the company
must survey the financial soundness of its approaching clients. It can moreover do a
credit analysis to play down the probability of clients paying late, causing the company
to bring about extra costs on the cash owed, by showing which clients are likely to settle
their accounts as they drop due. Credit examination is done by assessing and surveying
data relating to a customer’s budgetary history. This data may be given by exchange
references, bank references. The profundity of the credit investigation will depend on
the potential esteem of deals to the client, in terms of both arrange estimate and
anticipated future exchanging. As a result of credit examination, a company will choose
on whether to expand credit to a customer.
Credit control

Having amplified credit to clients, a company must consider ways to guarantee that the
terms beneath which credit was allowed are taken after. It is critical that clients settle
extraordinary accounts on time and keep to concurred credit limits. Components to
consider here are, hence, the number of past due accounts and the sum of
extraordinary cash. The exchange receivables administration arrangement will stipulate
the substance of the starting sales invoice that is raised. It will too exhort on the
recurrence with which explanations are sent to remind clients of outstanding sums and
when they are due to be paid. It will be valuable to plan an aged receivables
investigation at standard interims, to center administration consideration on ranges
where activity must be taken to empower installment by clients. Another calculate to
consider is that customers got to be made mindful of the sums extraordinary on their
accounts and reminded when installment is due. This will be done by giving customary
explanations of account and by sending reminder letters when payment is due.

Receivable’s collection
n a perfect world, all clients will settle their extraordinary accounts as and when they
drop due. Cash gotten must be banked rapidly on the off chance that installment is not
made electronically by credit exchange to diminish costs and increment benefit. Past
due accounts must be taken after up to survey the probability of installment and to
decide what advance activity is needed. Within the most noticeably awful cases, lawful
steps may have to be taken to recuperate exceptional sums in spite of the fact that as it
were as a final resort.
The level of investment in trade receivables
On the off chance that the sum of back tied up in exchange receivables is considerable,
receivables administration arrangement may be defined with the purposeful of
diminishing the level of venture by more tightly control over the way in which credit is
allowed and progressed strategies of evaluating client financial soundness.

QUESTION 5C

Exchange credit and the fetched of elective forms of short-term financing are to
be defined.
Trade credit is the only and most critical source of short-term back for many companies.
Once more, it could be an adjusting act between liquidity and productivity. Early
settlement discount. It is ordinarily seen as a ‘free’ source of fund. While typically
regularly true, it may be that the provider offers a markdown for early installment. In this
case deferring installment is not free since the fetched will be the misplaced discount.
The disbursement float which is the amount paid but not credited to the payers
account needs to be controlled.
The period that happens between the creation of an installment and the real time when
the installment is credited in great stores to the payee's account. Regularly, the littlest
piece of drift. A parcel of installment coast and incorporates mail delay and preparing
delay. Speaks to the delay between the time and receipt is sent/received and the time
the reserves have been exchanged between accounts and is available/deducted.
(incorporates collection and dispensing drift). Incorporates collection/disbursement drift,
but the greatest parcel on the off chance that related to the customer's payables
approach and the arranged exchange terms. Can be decreased by e-commerce and
viable administration of exchange terms.
Inventory management system should be in place.
A stock administration framework may be a device that permits you to track products
across your business’s supply chain. It optimizes the whole range traversing from
arrange arrangement along with your seller to arrange conveyance to your client,
mapping the total travel of an item. For any goods-based businesses, the esteem of
stock cannot be exaggerated, which is why stock administration benefits your
operational productivity and life span.
Appropriate methods need to be adopted for customer-to-business payment
through e-commerce.
Selecting the correct sort of installment strategy is fundamental and a basic assignment
for eCommerce. There are distinctive sorts of installment strategies and they change
from commerce to commerce. You must figure out which installment strategy will suit
the nature of your trade and at the same time offer to your clients. For accomplishing
productivity and victory, it can be considered as a basic step. No question, it is vital to
choose an installment strategy that is reasonable for your commerce, but you too must
consider other influencing variables. One of which is client interaction.
Company must centralize the financial function with regards to the number, size,
and location of vendors
No matter in the event that you work with one provider or hundreds, your commerce
must have a proficient seller administration framework to help with organizing contract
terms, focuses of contact, financials, and more. From provider determination and
onboarding to seller contracts and chance relief, there are a few steps that buyers ought
to consider taking to smooth out their merchant administration handle, sparing them
both time and money.

QUESTION 6A
For the most part amid the development of the trade, it may require a colossal sum of
capital. Consequently, they may likely to go for value to dodge settled installments of
intrigued. To raise value capital, a rights issue may be a quicker way to attain the
objective.

A venture where obligation subsidizing may not be accessible or costly more often than
not makes a company raise capital through a rights issue. Companies looking to make
strides their debt-to-equity proportion or looking to buy an unused company may elect
financing through the same route.

Sometimes troubled companies may issue shares to pay off debt to improve their
financial health. The company is saved from expanding on additional costs that are
incurred in announcing newer invitations of investing in shares such as advertising
costs, underwriting fees, and others.

There is always a possibility of future enhancement in the company’s reputation and

image in the market if the shareholders are kept satisfied. Rights issues do the same
provided they are structured in a profitable manner.

It is one of the speediest methods of raising additional capital vis-a-vis others as it is

counted as an internal matter of the concerned company and is kept free from a lot
many stringent guidelines and rules of regulators like Securities and Exchange Board of
India and stock exchanges. It does not leave much space for the directors of the
company to misuse the shares by offering discounted rates to their contacts or known
acquaintances as the principle essentially binds them to invite investments from existing
shareholders only.

There is no dilution in the incumbent value of the shares as with the newer issues, the
prices tend to fall automatically which are compensated by the additional shares
purchased by the shareholders. If a public offering of shares is made, then there is a
definite possibility of dilution.

QUESTION 6B
Quickest Strategy of Raising Capital- not at all like open offerings, the proper issue
includes less rigorous rules and direction because it is more of an inner matter. The as it
were convention that endures within the right issue is that the recorded companies
record a letter of offer with SEBI and stock trades for open comments to get
endorsement some time recently, they issue unused offers.
Expansion of Promoter Shareholding- the figure which turns out to be an colossal
advantage of the proper issue is that it makes a difference promoters to extend their
shareholding. The shareholders can subscribe to an ‘unsubscribed portion’ of the issue,
which elevates their shareholding.
Record Date and Estimating- to figure the qualified shareholders who can take part
within the rights issue, companies declare a record date. It makes a difference the
companies to issue rights and remunerate their shareholders with low-priced offers.
Besides, it assists profits them to raise the desired capital with greatest subscriptions.
In spite of the fact that, the proper issue is verifiably the cheapest source which helps a
company to accomplish the desired reserves, however now and then the companies
need to catch the drawback of it. Here are the foremost common restrictions of right
issue:
Raise capital up to a kept constrain- A clear downside of such an issue is that a
company cannot raise an amount in case of (IPOs) Introductory Open Advertising.
Generally, stock trades put a confinement on the sum on which a company can raise by
means of the correct issue. Moreover, the restrain is as a rule corresponding to the
existing value esteem of the company. In this manner in case, a company has
underestimated stocks, at that point raising stores through the proper issue might make
weight on the company.
Esteem of each share may get weakened- At the time of issue of value offers to raise
cash; there are chances of stake weakening of the existing shareholders. As the rate
shareholdings get decreased with the start of modern shareholders, it turns out to be a
troublesome circumstance for the existing shareholders.
Lessen the company’s open picture- By and large, the issue of right offers in an sign
of liquidity emergencies that a company endures. In the event that a rumored firm issue
right offers, at that point it makes a negative advertise assumption. Hence, shareholders
accept that the company is battling to run its commerce operations smoothly.
QUESTION 6C
Financing costs. Debt financing is usually cheaper than equity financing because it is
safer from the creditor's point of view. Interest must be paid before the dividend. As a
result, debt is a safer investment than capital, and therefore debt investors demand a
lower rate of return than equity investors. In addition, it is tax deductible hence it is
cheaper to a taxpaying company.
The current capital gearing of the business. Although debt is attractive because of its
low cost, its disadvantage is the need to pay interest. A company's debt level is usually
measured by its capital scheme, and companies should ensure that it is not too high.
Comparisons with other companies in the industry or with the company’s recent history
are useful here.
Operating gearing, it is the sum of a corporation's working costs that are settled as
restricted to variable. The higher the extent of settled costs, the higher the working
adapting. Companies with tall working equipping tend to have unstable working
benefits. This can be since settled costs stay the same, no matter the volume of deals.
In this way, in case deals increment, working benefit increments by a bigger rate. But on
the off chance that deals volume falls, working benefit falls by a bigger rate. By and
large, it may be a high-risk arrangement to combine tall monetary adapting with tall
working adapting. Tall working equipping is common in numerous benefit businesses
where numerous working costs are settled.
Voting control- A expansive issue of offers to unused financial specialists may change
the voting control of a commerce. On the off chance that the establishing proprietors
hold over 50% of the value they may be hesitant to offer unused offers to exterior
speculators as their voting control at the AGM may be lost.