1 All finance managers when making their decisions want to maximize shareholders wealth.

This

wealth is represented by the current market value of the company.Inorder to achieve this
objective, Finance managers make three major decisions as listed below

(1) Investment decision

This is the decision made in regards to which assets should be selected to invest funds in.
It can either be long term assets (capital budgeting) or short term assets (working capital
management).
-Capital Budgeting
This relates to investment proposal of an asset that will yield returns over a period of
time. Finance managers will have to choose an asset, assess its risk and uncertainty,
evaluate its worth and set specific strategy if shareholders wealth is to be maximized
otherwise this objective will not be achieved .
-Working capital management.
This involves management of current assets, ensuring that debts are collected, payables
paid in time, and keeping inventory at minimum level compatible with efficient
production. The aspect of working capital management is the trade off between
profitability and liquidity. Finance managers are therefore required to set up strategies to
ensure that this is achieved. If the firms working capital is not adequate it will struggle to
run its day to day activities
(2) Financing Decision
After the investment decision has been made the business will need some finances in
order for it to carry out its business effectively. Managers will decide where to get these
finances from be it long term or short term depending on the nature of the business,
requirements of investors and amount of finance to be made available. The concern of
financing decision is the capital structure which is the proportion of debt and equity
capital. Its up to the manager to make a choice on the proportion of these sources to
finance the investment requirements. The use of debt implies a higher return to the
shareholders but its also a financial risk. Therefore debt and equity should balance to
ensure a trade off between that risk and the return to
y shareholders.

(3) Dividend Decision

Any business is expected to make profits if proper investment and financing decisions
were made. The finance manager will either give all the profits to the owners of the
company or just a part of it and the rest put it back in business as investment to earn

further returns. This decision on dividends to be paid can affect value of the company and
how it will raise funds in future .Managers will have to make proper decisions here if the
company is to continue operating inn subsequent years.

2(a) a.Market Capitalization

Ordinary shares
Value per share
( 20m/0.5 )
Market capitalization (4*40m)
Increase /Decrease invalue of benthu Co

2014
MK(million)
20
40
(20m/0.5)
160 (3.98*40m)

2013
MK(million)
20
40
159.2

(160-159.2)m=0.8 million

Therefore the value has increased by MK800,000 using market value

b. Realisable value Added

Net asset value (99.3m-7m-25m )

Non current assets (86m-91m)
Inventory
(4.2m-3.8m)
Receivables
(4.5m-3.6m)
Asset value
Increase/decrease

2014
MK(million)
67.2
(5)
0.4
( 0.9)
61.7

2013
MK(million)
( 79.44m-21.68m) 57.76
(80m-72.8)
7.2
(4m-3.04)
0.96
(3.6m-2.7m)
(0.9 )
65.02

61.7m-65.02m=K3.32 million

The value of Benthu Co has decreased by MK3.32 million using realisabl;e value

c. Price/earnings ratio method using business sector average price /earnings ratio

Profit for the year after tax

2014
MK(million)
10.1

2013
MK(million)
9.7

Total average
(10.1m*15times)
151.5
(9.7*15 times)
145.5
Increase/decrease
151.5m-145.5m= MK6 million
The value of Benthu Co has increased by MK6 million using price/earnings

B) ( a )Economic Value added( EVA)

Profit after tax

Cost of capital (99.3m-71m)*10%
Total economic value added

2014
2013
MK(million)
MK(million)
10.1
9.7
(9.22) (79.44m-6.68m)*10%(7.276)
0.88
2.424

Increase /decrease in value 2.42m-0.88m=Mk 1.54

There has been a change in Benthu Co which is a decrease by MK1.54 million using
economic value added
(b) Market value added

Market capitalization
Loan notes and share
Total value
Increase/decrease

(25m+20m)

2014

2013

160
( 45 )
115

159.2
(15m+20m) (35)
124.2

115m-124.2m=(9.2m)

There has been a change in Benthus CO which is a decrease by Mk9.2 million

References
1 Bpp,ACCA F9 Financial Management,2011 edition.
2 Business Management study manual,ABE,Corporate finance,2008 edition.

M,.;/

2 (a) increase / decrease in value of Benthu Co. between 2013 and 2014 using Market capitalization
(market value)
2014
20/0.5 *4=160

2013
20/0.5*3.98 =159.2

Decrease/increase in value 160-159.2 =0.8

There is increase in value of Benthu Co. between 2013 and 2014 by 0.8

(b) Increase/decrease in value of Benthu Co.between 2013 and 2014 using Realisable Value Method
2014

2013

Non current assets

86

80

Inventory

4.2

Trade receivables (80% of4.5)

3.6

Total

93.8

Value /share

(75% of 3.6)

2.7
86.7

93.8/40=2.35

86.7/40=2.17

Increase/decrease in value ( 2.35-2.17)=0.18

There is increase in value 0f Benthu Co, between 2013 and 2014 by 0.18

(c) Increase/decrease in value of Benthu Co. between 2013 and 2014 using price /earnings ratio method
using the business sector average price/earnings ratio
2014

Profit after tax

10.1

Number of shares

40

Earnings /share
Price/earnings ratio

(10.1/40)
(4/0.25)

0.25
16 times

2013

9.7

40
(9.7/40)

0.24

(3.98/0.24) 16.58 times

2 b To determine whether between 2013 and 2014 there has been a change in Benthus Co

a) Economic Value added(EVA)

b) Market value added (MVA)

Profit after tax

Cost of funds

(99.3*10%)

2014

2013

10.1

9.7

9.3

(79.44 *10%) 7.94

0.17
Decrease opf shareholders wealth by (1.76-0.17) 1.59

1.76