Advanced financial management revision question and answer

Advanced Financial Management Block Revision Mock Exams

(a) As an expert in the financial management of public projects, you have been requested to present a
seminar paper on “Project Management in the Public Sector; challenges and dilemmas.”

Required:
Explain the main issues you would address in your paper under the following headings:
(i) Phases of a public project.
(ii) Planning and control techniques for a public project
(iii) Causes of failure of public projects.

(b) Savanna Limited has a cost of equity of 10%. Currently it has 250,000 ordinary shares which are quoted at the Stock Exchange of Sh. 120 per share. The company‟s earnings per share is Sh. 10 and it intends to maintain a dividend payout ratio of 50% at the end of the current financial year.

The expected net income for the current year is Sh. 3 million and the available investment proposals are estimated to cost Sh. 6 million.

Required:
(i) Using the Modigliani and Miller (MM) model, show that the payment of dividends does not affect the value of the firm.
(ii) What are the assumptions inherent in the MM models
ANSWER
(i) PHASES/STAGES OF PROJECT MANAGEMENT

1. Planning phase
This stage is concerned with articulation of the broad investment strategy and the generation/preliminary screening of project proposals.

The investment strategy defines the broad areas of the types of investment that the firms plans to undertake. This provide a framework that shapes, guides and circumstances the identification of the individual projects.

2. Project analysis
If the preliminary screening suggests that the project is prima facie worthwhile, a detailed analysis of the marketing technical, financial, economic and ecological aspects is undertaken, the forecast of this stage is on gathering and summarizing relevant information of various project proposals that are being considered.

Based on information developed in project analysis, the stream of costs and benefits associated with the project can be defined.

3 Project selection
This follows and often overlaps analysis – It addresses the question – is project worthwhile. A wide range of proposal criteria have been suggested to judge the worth whiles of the project.


4 Project implementation
The implementation phase consists of several stages especially for
industrial process.

5 Project Review
Once the project is commissioned the review phase is set in motion. Performance review should be done periodically to compare actual performance against the project performance. A feedback device is useful in several ways.

It throws light on how realistic the assumptions on defying the project
It provides a log of documented experience that is highly valuable in future decisions.
It suggests collective action to be taken in light of actual performance. Helps in uncovering judgemental biases
It induces a desired caution among the project personnel.

(iii) PROJECT PLANNING AND CONTROL TECHNIQUES

Project contract basically start with project planning since the project is the key to determination of adequate contract procedures and mechanisms. The contract

techniques used throughout in the project management stage include:

1. Work breakdown
2. Project planning (Ghantt) charts
3. Network plans
4. Critical path methods
5. Program evaluation and review techniques
6. Network analysis using historical estimating behavior
7. Network simulation
8. Simulation using historical estimating behavior
9. Graphical Evaluation and Review Techniques(GERT)
10. Line of Balance (LOB)

(iii) Causes of project failure

Project failure means a failure of the project to meet its desirable objectives within its desirable costs.
Where the desired objective is to generate a profit, the failure is clearly in a large part of the financial failure.
However, where the desired objective is not a financial one, the possibility of completing the project with a reasonable cost has an important financial as well as technical aspect to it.

Main causes of project failure include:

Unclear aim or inadequate definition of requirements i.e. poor project planning/feasibility.
Inadequate project control – failure to use project control.
Inadequate/poor project management – Project team may not be qualified for their responsibilities.
Project manager Project engineer Project control engineer
Project purchasing officer/agent Project accountant
Project construction manager Engineering coordinator Areas superintendent Liaison officer

Inadequate information flows due to poor management information system (MIS) Confusion of responsibilities due to political interference
Failure of the sub-contractors
Faulty equipment using poor materials
Labor problems e.g. strikes, go slows, labor turnover
(b) (i). According to MM, the price of a share today. (Po) is actual to the present value.
(1). Expected DPS (d1) at year end

(2). Expected MPS (p1) at year end

Alternatively


With and without dividends, the value of the firm is Sh. 30m hence dividends are irrelevant

(ii). Assumption of MM
no personal and corporate taxes
perfect certainty investors such that required rate of return is equal to cost of capital perfect capital markets without transaction cost and there is free flow of information investment decisions are fixed and independent of financing and dividend decisions.

 

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