1

1 A
2 A
3 A
4 D
5 D
6 C
7 B
8 B
9 C
10 B
11 B
12 A
13 C
14 C
15 D
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
D
B
A
C
B
C
A
B
B
B
C
A
A
D
A
31
32
33
34
35
36
37
38
D
B
A
D
B
B
A
B
39 B
40 C
(60 marks)
Question 2 - Financial Accounting and Financial Statement Analysis
2(a) A non-current asset is said to be impaired when its recoverable value is lower than its carrying value in the books.
(2 marks)
2(b) Return on capital employed (ROCE) is commonly referred to as primary ratio
because it is a product of several other ratios which are referred to as secondary
ratios.
ROCE gives a concise summary of the return management has made on the
resources made available to them before making any distribution of those
returns.
(1 mark)
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2(c) Revenue from the sale of good could be recognized if the following conditions are fulfilled: i.
It is probable that future economic benefits would flow to the entity. ii.
These economic benefits can be measured reliably.
(1 mark)
Question 3 - Economics and Financial Markets
3(a) When government embarks upon an expansionary fiscal policy, it results in
an increase in government deficit. It would also lead to an increase in
aggregate demand.
As per the IS-LM framework, the IS curve would shift rightwards leading to an
increase in the rate of interest. An increase in the interest rates would decrease
investment: this reduction in investment is known as ‘crowding out’.
(1 mark)
3(b) When domestic currency depreciates, prices of domestic goods and services become less expensive than abroad. Foreign demand and hence exports rise, while imports decline.
If the Marshall- Learner condition holds, then trade balance would improve.
(1 mark)
3(c) Discount window operation is where commercial banks, and other depository institutions, are able to borrow reserves from the Central Bank at a discount rate.
This rate is usually set below short term market rates (T-bills). This enables the institutions to vary credit conditions, thereby affecting the money supply.
(1 mark)
Question 4 - Quantitative Analysis and Statistics
4(a) Practical applications of statistics in the Nigerian capital market include: i.
In risk assessment and analysis. ii.
In the construction of market indexes. iii.
In technical analysis- graphs, momentum. iv.
In financial model construction and formulation.
(2 marks)
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4(b) Index numbers are used to measure changes in some quantity which we cannot observe directly e.g index of exports in Nigeria. i.
Index numbers are used especially to compare the cost of living. For example, in constructing the consumer price index which is an important economic indicator. ii.
Stock market indexes are measures based on index numbers. iii.
Index numbers enable analysts to reduce unwieldy business data into easily understood terms. iv.
They are useful in policy formulation since they reflect market trends. v.
They are useful guide in measuring and managing inflation.
Any two; ½ mark for each point
(Maximum 1 mark)
Question 5 - Financial Accounting and Financial Statement Analysis
To : The Board of Transnational Plc
From : Chief Accountant
Subject : Potential acquisition of either of Access Ltd or Bestway Ltd as subsidiaries in the machine tool manufacturing sector. Assessment of
Financial performances.
As instructed by you, I have investigated the financial performances of these
two companies to assist in evaluating them as potential acquisitions.
It should be borne in mind that financial ratio analysis is only partial
information. There are many other factors which will need to be borne in mind
before a decision can be taken.
The calculations of the various ratios are given as an appendix.
Profitability
While the main interest to the board is what Transnational Plc could obtain in profitability from Access Ltd and Bestway Ltd, all I can comment on at present is the current profitability enjoyed by these two companies.
Here the most important ratio is ROCE (return on capital employed). Access's ROCE is
27.2% as compared with B's 15.6%.
The great difference in ROCE can be explained by reference to the secondary ratios of profit and asset utilization. Both ratios are in Access' favour. The profit ratios are
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Access 34%: Bestway 29%. The asset utilization ratios are Access 0.9%: Bestway
0.6%, showing that Access is utilizing its assets 50% better than Bestway. It is the effects of these two ratios that give the ROCE for each company.
The very low working capital employed by Access Ltd very much affects the asset utilization ratio. How far such a low working capital is representative of that throughout the whole year is impossible to say.
Liquidity
It would not be sensible to draw a final conclusion as to the liquidity positions of the two companies based on the balance sheet figures. As a balance sheet is based at one point in time, it can sometimes be misleading. A reading of figures over a period would be more appropriate.
Access Ltd does appear to have a short-term liquidity problem, as the current assets only just cover current liabilities. The 'quick' or 'acid test ratio' on the face of it appears to be very inadequate at 0.6. By contrast, Bestway Ltd with a current ratio of 1.4 and a
'quick ratio' of 1.0 would appear to be reasonably liquid.
However, much more light is shed on the position of the companies when the debtor collection period is examined. Access Ltd collects its debts with a credit period of nine weeks. In the case of Bestway Ltd this rises to an astonishing 36.7 weeks. Why is this so? It could be due simply to very poor credit control by Bestway Ltd. Such a long credit period casts considerable doubt on the real worth of the accounts receivable.
There is a high probability that many of the debts may prove difficult to collect. It might be that Bestway Ltd, in order to maintain sales, has lowered its requirements as to the creditworthiness of its customers. If the credit period were reduced to a normal one for the industry it might be found that many of the customers might go elsewhere.
The problem with accounts receivable in the case of Bestway Ltd is also carried on to inventory. In the case of Access Ltd the inventory turnover is 4.3 falling to 2.8 in
Bestway Ltd. There could be a danger that Bestway Ltd has inventory increasing simply because it is finding it difficult to sell its products.
Capital gearing
Access Ltd is far more highly geared than Bestway Ltd: 39.6% as compared with 14.1
%. An assessment of the gearing level in this particular industry by means of inter-firm comparison should be undertaken.
Limitations of ratio analysis
You should bear in mind the following limitations of the analysis undertaken: i.
One year's financial statements are insufficient for proper analysis to be undertaken. The analysis of trends, taken from, say, five years' accounts would give a better insight. ii.
Differences in accounting policies between Access Ltd and Bestway Ltd will affect comparisons. The use of historical costs brings about many distortions. iii.
The use of industry inter-firm comparisons would make the ratios more capable of being interpreted. iv.
The plans of the companies for the future expressed in their budgets would be of more interest than past figures.
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Conclusions
Depending on the price which would have to be paid for acquisition, I would suggest that
Access Ltd is the company most suitable for takeover.
Chief Accountant
Appendix
Access   Ltd   Bestway   Ltd
iv   i   ii
iii
Return   on   capital   employed
Assets ratios
Total revenue:
Non ‐
utilisation assets
current assets ratios
Working revenue:
Revenue
Profitability
to   revenue: capital
Gross   profit   %
PBIT   /    Capital employed
Revenue
Total   assets
211    X   100
775
985
1,140
=27.2%
=   0.9
88     X   100
565
=   15.6%
560
990
=   0.6
Revenue
Non ‐ current   assets
985
765
=   1.3
560
410
=   1.4
Revenue
Working   capital
985
10
=   98.5
560
150
=   3.7
Gross   profit    x   100
Revenue
335    X   100
985
=   34%   163    X   100
560
=   29%
Profit   before
Interest   and   taxation    as   %   of
Revenue
Liquidity   ratios
PBIT     x    100
Revenue
Current
Acid   ratio:
test
ratios:
Accounts
or receivable
Quick weeks:
211
985
X   100
=   21%   88    X   100
560
=   16%
Receivable
Credit
x
Sales
52
Current   assets
Current   Liabilities
375
365
CA  ‐  Inventory              current   Liabilities
220
365
=   1.0
580
425
=   0.6
440
425
170    X   52
985
=9   weeks
=
=
1.4
1.0
395   x   52
560
=
36.7wks
Capital   Structure
Gearing   ratio:
Long ‐ term   borrowing        shareholders'   fund
220    X   100
555
=
39.6%
70    X   100
495
=
14.1%   v   proprietary   ratio:   Shareholders'   fund
Tangible   assets
555    X   100
1,140
=   0.5
495
990
=   0.5
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Question 6 - Economics and Financial Markets
6(a) On the money market, a reduction of the money supply leads to an excess demand for money. To restore equilibrium, interest rate has to increase. This will also increase the speculative demand for money and therefore overall demand for money.
At the macroeconomic level, using the IS-LM model, LM curve shifts upwards from
LM1 to LM2. Since interest rate is now higher, the demand for goods and services for investment drops. This reduces overall demand. As demand decreases, overall production also will decrease.
The final impact is that interest rate increases form i1 to i2, and production/income decrease from Y1 to Y2 representing a recession.
Interest
LM2
i2
i1
LM1
IS
Y2 Y1 Income
(5 marks)
6(b) To limit the consequences of this crisis, one possible advice to give the Federal government is to increase money supply. This could be achieved for instance by reducing the MPR or through Open market operation. The effect will be an excess of money supply. To restore equilibrium, interest rate has to drop.
On the money market, excess money supply leads to a decrease of the interest rate, which stimulates investments. In turn overall demand and production will increase as a consequence.
The final effect will be a reduction in interest rate and an increase in production
(or income).
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Interest LM2
12
LM3
I3
IS
Y2 Y3 Income
(4 marks)
6(c) The following are ways by which policy makers could support the advancement of technological progress in Nigeria: i.
Supporting scientific and technological advancement through training, and adequate funding of research/ development activities. ii.
Development of human capital trough enhancement of knowledge, education and technical skills. iii.
Development of entrepreneurial talents and support of related activities iv.
Motivation of economically active individuals to pursue entrepreneurial ventures v.
Removing barriers to entrepreneurial activities by making it easier and attractive to do business vi.
Provision of infrastructural facilities like power, good roads, water and other utilities
(4 marks)
6(d) The law of purchasing power parity is a generalization of the law of one price. It states that the price of representative baskets of goods and services in different countries must be the same when expressed in a common currency.
It has been discovered that in real life the law of PPP generally holds in the long run. Statistics have shown that over a time horizon of several years, exchange rate movements between countries tend to follow relative inflation changes.
However, the weakness of PPP is that it generally tends to fail to predict short term exchange rate movements. Exchange rates in a clean float regime tend to fluctuate much more strongly than could be explained by changes in international relative price levels only.
(4 marks)
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Question 7 - Quantitative Analysis and Statistics
7(a)
Let y1 – investment in the Banking y2 – investment in conglomerates y3 – investment in Food and Beverages y4 – investment in Breweries y5 – investment in Risk-free securities
Objective Function :
Maximize Total Return = 0.08y1 + 0.10y2 + 0.11y3+ 0.12y4 + 0.09y5
(2 marks)
Subject to constraints:
Y1 ≥ 0, Y2 ≥ 0, Y3 ≥ 0, Y4 ≥ 0, Y5 ≥ 0 - Non –negativity constraint
Y1 + Y2 + Y3 + Y4 + Y5 ≤ 20, 000, 000 - total available funds y5 ≤ 6, 000,000;(30% of 20,000,000) - constraint on investment in Risk-free securities y4 ≤ 0.1 (y1 + y2 + y3 + y5) - constraint on investment in Breweries y2 + y3 ≤ y1 - constraint on investment in Conglomerates and F& B y3 + y4 ≤ y5 – constrain on investment in F & B, and Breweries
(5 marks)
7(b) The following are fundamental assumptions of linear programming: i.
Non –negativity – Only positive values of variables are assumed. ii.
Linearity - This requires that the value of the objective function and the response of each resource expressed by the constraints is proportional to the level of each activity expressed in the variables. iii.
Divisibility - the values of decision variables can be fractions. iv.
Certainty – the coefficients are known and constant.
(4 marks)
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