An unedited AFM walkthrough

You nailed this.

The move that puts you into Level 3 is your integration of the trapped-cash reality into the financing choice itself — you didn't treat the exchange controls as a separate "context" bullet point and then evaluate the bonds in isolation. You connected them: you named why the Eurobond's fixed coupon becomes a group-level obligation (because ZNL's cash can't be relied on), you identified what the GDR's disclosure regime would actually expose (the political-risk position, not just a compliance box), and you weighed those consequences against the alternatives with commercial judgement. That's evaluation at Level 3 — cause-and-effect reasoning that moves through the constraints into a differentiated recommendation, not a checkbox list.

Your part (i) also did the work: you separated the two harms of the controls (quantum constraint + timing friction), you named why the trapped-cash figure signals something structural, and you were properly sceptical about the workaround strategies — transfer pricing, withholding tax, CBN approval risk — rather than pretending they solve the problem. And your part (ii) recommendation didn't hide: you acknowledged the real servicing risk of the Eurobond ("It's manageable if the expansion returns more than 6.8%"), but you also called out what the GDR actually does in this context — it adds equity to a group that already can't repatriate its equity value, and it broadcasts the very constraint that makes the group less attractive to new investors.

You hit the authored command verbs — evaluate (you weighed significance against the investment case), assess (you moved through both options and their distinct consequences), recommend (you backed a choice and said why) — and you're solidly in the band because your reasoning turned on the specifics of Zephyr's constraint, not generic "bonds are cheaper, equity is dilutive" framing.

Since you've landed it, you're welcome to say "show me the model answer" if you'd like to see the exact layout and structure a full-marks version takes.

Well done — you've worked through the commercial and structural constraints here with real precision, and your recommendation sits on solid foundations. The worked answer below shows the full-marks layout: notice how it sequences the repatriation constraint, the cash-flow timing impact, and the trapped-cash exposure before moving to remedial strategies, and then how it weighs debt servicing risk against dilution and disclosure burden in part (ii). Compare the architecture of your answer against that sequencing — the logic flow, the order in which you've introduced each constraint, and how you've moved from problem to mitigation to choice — and ask yourself whether any of those moves would strengthen how you'd tackle a similarly layered question on subsidiary funding or political risk. Take a moment with that comparison, then apply the same rigorous layering to a fresh multi-jurisdiction case.

© Gradd — for your personal exam preparation.

Exchange controls and international sources of finance

Part (i) — Significance of exchange controls and remittance strategies

Nigeria's CBN restricts ZNL to repatriating only 50% of after-tax profits annually, meaning that even though ZNL earns NGN 18 billion per year, the parent's accessible cash yield is structurally capped at roughly half that figure. This is material for investment appraisal: Zephyr must discount only the genuinely repatriable cash flows, not the subsidiary's gross profit, otherwise it will systematically overstate the investment's value.

The 14-month average processing delay worsens this picture further. Even the permitted tranche of remittances arrives late, reducing its present value and creating a timing mismatch between ZNL's cash generation and Zephyr's ability to deploy it — this may force unnecessary external borrowing at the group level in the interim.

The accumulated NGN 42 billion trapped cash balance illustrates the long-run severity of these controls: a stock of value equivalent to more than two years of ZNL's profits is stranded in Nigeria. Inflation and naira depreciation could erode this balance in real, euro-equivalent terms over time, meaning political risk compounds currency risk. Zephyr should factor this erosion risk explicitly into its investment case.

The most practical remittance strategy is to redeploy the NGN 42 billion trapped funds within Nigeria — for instance, financing the local infrastructure of the distribution network expansion — thereby converting idle trapped cash into a productive asset without triggering CBN approval. Supplementary strategies such as intra-group management fees, royalties, or intercompany loan interest may reduce reliance on dividend remittances and may avoid the 50% dividend cap if validly documented, but they do not remove the wider exchange-control risk: they may still require CBN approval, face FX availability delays, withholding tax and transfer-pricing scrutiny. They are mitigation tools, not a clean bypass.

Part (ii) — Eurobond vs GDR: assessment and recommendation

The Eurobond at a fixed coupon of 6.8% offers certainty of cost and protects existing shareholders from dilution. However, the coupon is an unconditional USD debt-service obligation: if Nigerian remittances stay delayed or trapped as they are today, that obligation cannot rely on ZNL's cash flows and must instead be serviced from Zephyr's other group cash flows — a financial-risk exposure despite the absence of dilution. For a group already holding NGN 42 billion of trapped equity-equivalent value in Nigeria that it cannot access, adding further equity via a GDR would deepen the disconnect between the group's book equity and its accessible capital — shareholders bear additional dilution for a problem that equity issuance does not solve.

The GDR on the Luxembourg Stock Exchange avoids fixed debt service, which is an advantage in principle, but the EU prospectus disclosure requirements would force Zephyr to publicly detail ZNL's remittance constraints and the trapped-cash balance, creating investor-relations risk and potentially triggering governance scrutiny precisely when the Nigerian situation is already sensitive.

Recommendation: The board should proceed with the Eurobond. The 6.8% fixed coupon is serviceable if the distribution network expansion earns a return in excess of that rate, the no-dilution feature protects existing shareholders, and the absence of enhanced public disclosure avoids inflaming investor concern about the CBN restrictions. The GDR is unsuitable given the circumstances: it dilutes equity without addressing the trapped-cash problem and introduces disclosure obligations that heighten, rather than manage, the political-risk exposure.