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SECTION A

Compulsory Question: Carries 40 marks

QUESTION 1

(a) Kingsfork Inc. Company limited a United State of America based company has shareholders
from across the world. It has direct foreign investments in over 20 countries and a foreign
portfolio investment in a good number of countries. Kingsford Inc. generates about 45% of its
annual sales from its business outside the USA.

The decision in Kingsfork Inc. are reportedly considered more complex and demanding compared
to when it had its operations only in USA. However, the company enjoys expanded opportunity
set from a global business environment and strives hard to not only maximize its corporate
wealth but its shareholders´ wealth as well.

Kingfork Inc. is considering establishing some more subsidiaries and business. The CEO however,
is worried about the possible loss from terrorist activities, strikes, host country`s discriminatory
tax policies and unstable macroeconomic variables and therefore hesitates to pursue the course.

REQUIRED:

(i) Would you consider Kingsfork Inc Company a “Multinational Corporation” or an

“International firm”? Why? (4 marks)
(ii) Explain why decisions by Kingsfork Inc. Limited are reportedly considered more
complex and demanding than when when it had operations in one country. (6 marks)
(iii) Describe major external factors that a company such as Kingsfork should consider
before taking a particular direction. (8 marks)
(iv) Identify and discuss the key risk that make the CEO worry about establishing new
business and suggest any four possible mitigation measures. (6 marks)

(b) Kipupwe Limited reported a net income of TZS 770,000,000 in year 2019, after interest
expenses of TZS 320,000,000. The effective tax rate was 36%. It had provided depreciation of TZS
960,000,000. Capital expenditure incurred during the year amounted to TZS 1,200,000,000. The
amount of debt outstanding was TZS 4,000,000,000 at 8%

The beta of the stock is 1.05. The shares outstanding were 2,000,000. Kipupwe Limited paid 40%
of its earnings as dividends. The working capital requirements are negligible. The treasury bond
rate is 7% and the risk premium for this industry is 5.5%. (Use the free cash flow approach where
applicable).

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REQUIRED:
 (i) Estimate the free cash flow to the firm in 2019. (4 marks)
(ii) Estimate the value of the firm at the end of 2019. (6 marks)
(iii) Find the value of equity and the value per share at the end of 2019. (6 marks) (Total =
40 marks)

SECTION B

There are FIVE questions. Answer ANY THREE questions.

QUESTION 2

(a) Kibongo Company Ltd, a Tanzania based manufacturer of high quality tennis rackets, is
considering establishing a subsidiary in Switzerland to manufacture and sell the tennis rackets
locally. The finance and investment department of Kibongo Company Ltd was asked to supply
relevant information for capital budgeting analysis. All relevant information follows:

Initial investment: An estimated 400,000 Swiss francs (sf), which includes funds to support
working capital would be needed for the project. Given the existing sport rate of TZS 550 per sf,
the TZS amount of the parent`s initial investments is TZS 220 million. The investment will be
done in December 2020, and project is expected to start in 2021 and last for four years. The host
government of Switzerland has promised to make a payment to the parent in order to purchase
the plant after four years.

The estimated price, demand and variable costs schedules during each of the next four years are
shown here below:

Year Price per racket Demand- Variable Costs

(Sf) Switzerland (VC) per racket
(Sf)
2021 350 600 units 100
2022 400 600 units 100
2023 360 1000 units 150
2024 380 1000 units 180
The sport exchange rate of the Swiss Franc is TZS 550. The exchange rate is assumed to remain
constant, thus, the forecasted exchange rate for all future periods is TZS 550.The Swiss
Government will allow Kibongo Company Ltd to establish the subsidiary and will impose a 20%
tax rate on income. In addition, it will impose a 10% withholding tax on any fund remitted by the
subsidiary to the parent.

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The United of Tanzania Government will allow a tax credit on taxes paid in Switzerland, so that
earnings remitted by the parent will not be taxed by the United Republic Tanzania Government.
The Kibongo Company Ltd subsidiary plans to send all net cash flow received back to the parent
firm at the end of each year. The Swiss Government promises no restrictions on the cash flows to
be sent back to the parent firm, but does impose a 10% withholding tax on any funds sent to the
parent, as mentioned above

The Swiss Government will allow the subsidiary of Kibongo Company Ltd to depreciate the cost
of the plant and equipment at a maximum rate of Sf 60,000 per year, which is the rate to be used
by the subsidiary. The Swiss Government will send a payment of Sf 100,000 to the parent to
assume ownership of the subsidiary at the end of the four years. Assume there is no capital gain
or loss on the sale of the subsidiary. Kibongo Company Ltd requires 15% return on this project.

REQUIRED:

Discuss whether the proposal investment should be undertaken. (12 marks)

(b) Multinational enterprises are Companies that own/control subsidiaries located in foreign
countries that are active in production. To ensure ownership implies control in the firm`s
management decision making, they engage in foreign direct investment as opposed to just
portfolio investment.

REQUIRED:

Describe any four major strategic reasons for Foreign Direct Investment (FDI) (8 marks) (Total
= 20 marks)

QUESTION 3

(a) Currently, the sport exchange rate is TZS 1500/USD and the three month forward exchange
rate is TZS 1520/USD. The three-month forward is 8% per annum in Tanzania and 5.8% per
annum in the USA. Assume that you can borrow as much as TZS 3,000,000 OR USD 2000.

REQUIRED:

(i) Determine whether the interest Rate parity (IRP) is currently holding (2 marks)

(ii) Show how would you carry out covered interest arbitrage if the IRP is not holding (shows all
the steps and determines the arbitrage profit). (4 marks))

(iii)Explain how the IRP will be restored as a result of covered arbitrage activities. (2 marks)

(b) Define re-invoicing centres and clearly provide three of its to a multinational company. (5
marks)

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(c) Consider the following spot quotations below as given by a foreign exchange dealer at the Dar
es salaam Forex Market at 30th April 2019.
 UGS/TZS 2.50

USD/TZS 0.000625

UGS/USD 4800

Suppose you posses TZS 10,000,000, how would you take advantage of the above rates? (7
marks) (Total = 20 marks)

QUESTION 4

Nshomire Plc currently operates only in Tanzania but is considering diversifying its activities
internationally into either Uganda or Kenya. Estimates have been obtained of the likely risk and
return of investments in these countries which are expected to vary during different economic
states of Tanzania. After either diversification, an approximately 30% of the market value of the
company would be represented by overseas investments.

The standard deviations of expected returns of Uganda, Kenya and Tanzania are 4.86, 12.26 and
4.0 respectively. Also, the covariance of expected returns of Tanzania/Uganda and
Tanzania/Kenya are 17.89 and 31.98 respectively.

Members of Nshomire’s board of directors have different views about such diversification.
Director A believes that the company should focus exclusively upon the Tanzania market as it
always has, because overseas investments are too risky. Director B believes that overseas
diversification will offer the company the opportunity to achieve a much better combination of
risk and return than purely domestic investments and will open up new opportunities. Director C
considers overseas investments expensive and argues that overseas diversification will not be
valued by shareholders who could easily achieve such diversification themselves. Director D is
also in favour of Kenya but suggests that a much higher proportion of the company’s activities
should be located there, possibly between 50% and 70%.

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REQUIRED:
 (a) (i) Discuss the views of each of the four directors. Include in your discussion, relevant
calculations regarding portfolio risks and returns. (12 marks)

(ii) Estimate and explain the implications of the correlation coefficients between Tanzania and
Uganda and between Tanzania and Kenya (4 marks)

(b) Nshomire Plc has also purchased CAPM-based risk and return estimates from an investment
bank.

REQUIRE
D:

Assuming this information is accurate, show how it might be used to assist the diversification
decision. (4 marks) (Total = 20 marks)

QUESTION 5

(a) COWISA Company Ltd, based in Dodoma Tanzania, needs to borrow USD 50 million for one
year to finance a project of Modern UPVC Machines currently to be installed in December 2018.
COWISA can borrow in US Dollars at 13% or in Tanzania shillings at 9%. Currently, the exchange
rate is TZS 1550/USD.

REQUIRED:

(i) Briefly explain what the difference in the two interest rates implies about markets`
expectation in change in the values of the two currencies. (2 marks)

(ii) Estimate the exchange rate at the end of the year that will make COWISA company Ltd
indifferent between borrowing in USD and TZS. (4 marks)

(b) With practical examples, explain what is meant by the term “Dollarization of the economy”
as used in international monetary system. Does it have any drawback to the practicing country?
(6 marks)

(c) Explain four benefits of the multinational finance to global financial managers. (8marks)
(Total = 20 marks)

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QUESTION 6
TWIGA International, a company quoted on the Dar es Salaam stock exchange, has decided to
diversify into a new sector in order to reduce its risk. However, the company has not decided
whether to diversify through acquisition of an existing business in the new sector or to establish
a new company (organic growth). TWIGA International has cash balances of K240 million which
are currently invested in short-term money market deposits.

The company has identified a possible acquisition target, SERENGETI Ltd, a smaller quoted
company in the new sector. Even though SERENGETI Ltd is quoted, approximately 60% of its
shares are still owned by four directors.

These directors have stated that they might be prepared to recommend the sale of SERENGETI
Ltd, but they consider the total value of its shares to be worth K235 million. As a Finance Manager
of TWIGA International, you have been asked to establish if the value given by the directors is
reasonable. The following financial information has been provided:

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Other Information:
1. After the acquisition some land and buildings of SERENGETI would be sold for K8 million (after
tax).

2. Following the acquisition, it’s expected that 145 employees of SERENGETI would immediately
be made. Redundant at an after-tax cost of K10 million. Pre-tax annual wage savings are expected
to be K1 million. Pretax advertising and distribution savings are expected to be K750,000 per
year.

3. The four existing directors of SERENGETI would each be paid an after-tax consultancy fee of

4. K500, 000 per year for four years for consultancy services if the acquisition succeeds. This
amount would not increase with inflation. Ignore inflation.

REQUIRED:

(a) Estimate the value of SERENGETI Ltd using the following valuation methods:

(i) The comparative P/E

(ii) The dividend valuation model

(iii) The present value of relevant operating cash flows over a fifteen (15) year period.

(b) Advise whether, TWIGA International should proceed with the acquisition of SERENGETI Ltd
shares.

(c) Explain whether diversification through mergers and acquisitions is an effective means of
reducing risk and securing future growth for TWIGA International.

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