Namibia Business School
Corporate Finance (CBC 5999)
Assignment 1/2022 Due Date: 30 August 2022
Please read the questions below carefully and prepare a professional response to it, written in business English, and demonstrating a good understanding of the concepts and the application thereof, using credible resources, cited and referenced using the APA-style of referencing. Kindly take note that Wikipedia is not a credible source.
Assessment of the assignment:
The assignment consists of three components, and each will be assessed separately and jointly. First, the overall presentation, layout and use of business language will be assessed, which counts as 10% of the final mark of the assignment. Secondly, the technical component will be assessed, and it will be based on the mark allocated to each question and sub-question, the response to the questions and the application of theories and concepts. This part will count for 80% of the assignment mark. Lastly, the writing will be adjudged, of which referencing credible sources will be the key aspect. This component will count as 10% of the final assignment mark.
Question 1 (20 Marks)
You have determined that you will need N$200 000 per year for four years to send your daughter to university in South Africa. You have already saved N$40 000, and you have placed the money in an account that you expect will yield a monthly compounded interest rate of 0.75%. Money for the first of the four payments will be removed from the account exactly 15 years from now, and the last withdrawal will be made 18 years from now. You have decided to save more by making monthly payments into the same account, yielding 0.75% interest per month over the next 14 years beginning next month. You will take the money out of the 0.75% per month account and place it in a 6% per annum account in 14 years and take the cash out as needed.
How much money should you invest monthly to achieve this goal? Please provide detailed workings and commentaries explaining why you make certain assumptions and why you take certain actions, backed with appropriate academic sources.
Question 2 (25 Marks)
Wilfred Gibbs has been the chief executive officer (CEO) of Rhino Holdings, a listed company, for over 15 years, during which time the company has been very successful in capturing market share and achieving levels of profitability well in excess of it direct competition. Much of this success has been credited specifically to the way Wilfred has managed the company. So when he advised the board at its last meeting that he plans to retire at the end of the year, there was real concern about appointing his successor. Rhino Holdings is particularly aware that any uncertainty which may arise during the CEO transitional period could result in a fall in share price, which they clearly wish to avoid.
The remuneration policy at Rhino Holdings includes a provision for awarding significant share options to executive directors when the company attains high levels of performance. For many years the targets set by the remuneration committee have been exceeded, so Wilfred has accumulated a large number of share options which he can exercise at any time over the next year. As part of his retirement planning, Wilfred has consulted with an independent financial adviser who has recommended that he exercises his share options before he retires because they will deliver a taxefficient capital gain which he can then invest for his future. Clearly, it will be in Wilfred’s best interest to choose an exercise date when the share price is trading at its highest. So when a new contract opportunity was tabled by the sales director, which would clearly increase the company’s share price this year, Wilfred was an enthusiastic supporter. Unfortunately, the finance director advised the board that its bank loan contained a restrictive covenant requiring the company to maintain interest cover of four times its pre-tax profit. Although Rhino Holdings has always been able to meet this loan condition, the finance director is concerned that the further investment in the working capital needed for the proposed new contract presented a significant risk of breaching the loan covenant.
To address this issue, the CEO suggested that inventory could be valued differently in order to report a higher profit figure and thereby increase the level of interest cover.
He further suggested that ‘this minor policy change would not be opposed by shareholders’ as it would undoubtedly increase the value of the share price. He also advised the board that he was sure that he could use his longstanding friendship with the engagement partner of Rhino Holdings’ auditors, who he had trained with as an accountant many years ago, to convince the audit team to agree with the higher inventory valuation during the forthcoming audit.
2.1 Explain the term conflict of interest in this context, and using the information from the scenario, discuss how Wilfred Gibbs’s behaviour presents a clear conflict of interest, stating what course of action he should take. (10 Marks)
2.2 Describe the agency relationships at Rhino Holdings, and explain how clear accountability could increase trust between principal and agent, thereby reducing agency costs. Clearly identify the agency costs that could arise from
the above scenario. (15 Marks)
You are advised to comply with academic writing, referencing your suggested response to credible sources, of which one must be the NAMCODE which is applicable to listed companies in Namibia.
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