Question

QUESTION 1

Abonkele Global Bank operates commercial banking. The banking industry for some time is experiencing hard times and Chief Finance Officers (CFOs) are finding it difficult to turnaround their treasury and financial health of banks.

In a recent breakfast meeting at Abonkele Global Bank, the CFO made the following suggestions:

1. Since most of our clients leave their deposit for a very long time, I suggest we make use of such funds by investing them in real estate business. The real estate business is booming and is expected to growing at 10% per annum. We can use depositors’ funds as a good financing source and return immediately we make gains from the real estate business.

2. Currently, government treasury bill pays a return of 6% which is lower than the real estate investment. I suggest we move GHS54,000,000 of our investment from treasury bills into the real estate industry to increase our returns in this booming market.

3. To stay more profitable, I suggest we cut investment in working capital by 60% and investment in alternative products which can leverage our diversification.

4. He added “we need to make shareholders happy after all our principal goal is to maximize their wealth. An easy way to do this is to declare dividend every year and where possible undertake share repurchase to create liquidity for the shares of the company”.

Required:

Discuss the CFOs suggestions in line with the primary functions of a financial manager, showing clearly the implication of each of the four points raised. ​​​​(20marks)

Answer 1

The primary job responsibility of a CFO is to optimize the financial performance of a company,including its reporting ,liquidity and return on investment.

i)Being a key person of the Executive Member Team,the CFO regularly provided leadership in developing continuous short and long term financial decision.Here in the first instance ,as most of the clients are long therm depositors ,so in such cases as indicated by the CFO, the best sources of investment oppurtunities shoiuld be find out, which gives higher return.

ii) A CFO has to ensure credibility of finance people by providing timely and accurate analysis of financial trends and forecasts.Here it can be seen that the CFO has forecasted that the real estate would give a higher return as compared to government treasury bills.

iii)Being a CFO , s/he has to take hands on lead position of developing ,implementinh and maintaining a comprehensive cost system.In the present case the decision of reducing the working capital cost and making investment in alternative investment oppurtunities seems to be more profitable for the overall organisation growth.

iv) Every business prime motive is to maximise the wealth of shareholders i.e. Wealth Maximisation.As an CFO s/he has to evaluate and advises on the impact of long range planning , introduction of new proposal and regualtory action.CFOs seeking to propel their compasnies will help the comapny make strategic decision by taking an active role in financial analysis and management.