Strategic Financial Management · May 2014

Multiple-choice 6, 7 and 14 and short answers 12 and 15: Multiple-choice 6 asked for the name of the line linking expected return to beta (the security market line), 7 asked for a CAPM cost of equity (25.8%) and 14 asked which statement is NOT a CAPM assumption (that investors have different expectations). Short answers 12 and 15 asked for the capital asset pricing model and the arbitrage pricing theory. Read the sections on the CAPM formula and the arbitrage pricing model.

Multiple-choice 7 and 8: Question 7 gave a Treasury bill rate of 15%, a market return of 21% and a beta of 1.8, and the CAPM answer is 15% + 1.8 × 6% = 25.8%. Question 8 gave a recent dividend of ₦3.00, a cost of equity of 15% and growth of 5%, and the value is 3.00 × 1.05 ÷ (0.15 − 0.05) = ₦31.50. Read the section on the cost of equity.

Multiple-choice 8: Abolore Limited paid a recent dividend of ₦3.00 a share, has a cost of equity of 15% and expects constant growth of 5% in earnings and dividends. The expected share value is 3.00 × 1.05 ÷ (0.15 − 0.05) = ₦31.50 (option C). Read the section on constant growth.

Multiple-choice 9 and 10 and short-answer 13: Multiple-choice 9 asked what marks a successful acquisition in the long run (ICAN’s key: an increase in the market price of the acquirer’s shares over what it would have been). Question 10 asked which merger motive makes the most economic sense (economies of scale). Short-answer 13 gave AB Limited (5 million shares at ₦64) acquiring XY Limited (2 million at ₦35) by shares at market values; the answer is 1,093,750 shares. Read the sections on acquisition or internal growth, and the share exchange example.

Multiple-choice 11 and short-answer 9: Multiple-choice 11 asked which is NOT a direct source of finance to SMEs in Nigeria from microfinance banks, the Central Bank of Nigeria, the Bank of Industry, co-operative societies and friends and relatives (ICAN’s key gives the Central Bank). Short-answer 9 asked for the problem small firms face in obtaining bank loans under the 5Cs of lending (collateral or security). Read the sections on the financing problem.

Multiple-choice 13 and 20: Question 13 asked which source of finance is known as vendor credit (ICAN’s key gives hire purchase) and question 20 asked which factor is not significant in choosing short-term or long-term borrowing (the key gives the yield curve). Read the section on term and commitment.

Multiple-choice 15: Adeoye Plc (quoted) has a P/E ratio of 20. Moonshine Limited, which is not quoted and is similar in all respects, has after-tax earnings per share of ₦1.50. The value of a Moonshine share is 20 × ₦1.50 = ₦30.00 (option D). Read the section on the P/E ratio method.

Multiple-choice 17: The question asked which item is NOT part of a complete financial plan. The options were a detailed profile of all management staff, clearly stated strategic, operating and financial objectives, the assumptions on which the plan is based, a description of the underlying strategies and contingency plans for emergencies. The answer is the profile of all management staff. Read the revision list and the order of working.

Multiple-choice 18 and short answers 4 and 17: The multiple-choice question asked for the measure of how well the returns of two risky assets move together (covariance). The short-answer questions asked for a combination of securities giving the highest expected return for a given standard deviation (an efficient portfolio) and for the correlation of two projects that are completely and positively linearly dependent (+1). Read the sections on covariance and on the efficient frontier.

Multiple-choice 19: The question asked which is NOT a method of raising capital from existing and prospective shareholders from offer for subscription, tender offer, rights offer, offer for sale and stock exchange introduction. The answer is stock exchange introduction, because it raises no new cash. Read the section on the methods of raising equity.