SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT

AFIN 209- CORPORATE FINANCE AND FINANCIAL MODELLING

MID SEMESTER EXAMINATION

FRIDAY, 19TH OCTOBER 2018

09:00- 12:00 HOURS

Time Allowed: Three (3) Hours plus 5 minutes reading time.

Instructions to Candidates:

1. Read the instructions very carefully.

2. Check that you have the correct examination paper in front of you.

3. There are FIVE (5) questions in this question paper. Answer ALL
questions.

4. All questions must be answered in the answer booklet provided only.

5. Write down the number of questions that you have answered on the
cover of the examination answer booklet.

6. Begin answering each question on a new page in the answer booklet

provided only.

7. There shall be NO communication among students during the

examination. Any students caught doing this will be disqualified.

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

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QUESTION ONE

Below is the table pertaining to the stocks of two listed companies at Lusaka Stock
Exchange

State of the Probability of the State Returns if State

Economy of the Economy Occurs
Stock A Stock B
Boom 40% 12% 20%
Normal 60% 6% 4%

Required

a) Find the expected return (mean) and standard deviation of returns for each
stock [4 Marks]
b) Find the covariance and correlation of returns for the two stocks [4 Marks]
c) If stock A and B are combined in a portfolio with 30% invested in stock A and
70% invested in stock B, find the portfolio expected returns and standard
deviation. [8 Marks]
d) Briefly, but clearly explain the terms systematic risk and unsystematic risks
with examples [2 Marks]
e) The risk-free rate of return is 4% and the market risk premium is 8%. What is
the expected rate of return on a stock with a beta of 1.28? [2 Marks]

[Total: 20 Marks]

QUESTION TWO

a) What is a financial system and what role does it play in an economy? Briefly
discuss the financial institutions, markets and financial instruments found in the
Zambian financial system. In your opinion what needs to be done to enhance
the efficiency and effectiveness of our financial system. [10 Marks]
A person deposited K10,000 into a prudential retirement savings plan on 4th
February 1998.How much will be in the plan on 4th February 2018,if interest is
compounded daily at 11.4%?(use exact time) [2 Marks]

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 b) How much would have to be deposited today in an investment fund paying
interest at 10.4% compounded monthly to have 20,000 in 3 years’ time
[2 Marks]
c) How long will it take 20,000 to accumulate 8000 interest at 10% compounded
quarterly, if compound interest is allowed for the fractional part of a conversion
period? [3 Marks]
d) Laurence Paul investment managers Limited advertises that they will triple
your money in 10 years’ time. What rate of interest compounded monthly is
implied? [3 Marks]
[Total: 20 Marks]

QUESTION THREE

a) Consider a bond that pays 8% coupon rate annually and has a face value of
10,000.Calculate the yield to maturity if the bond has
(i) 20 years remaining to maturity and it is sold at K12,000 [4 Marks]
(ii) 10 years remaining to maturity and it is sold at K9,500 [3 Marks]
Given the two scenarios in (i) and (ii) above, using the yields computed,
which of the two relates to a bond sold at a premium? [1 Marks]
b) Lafarge bonds have 10 years remaining to maturity. Interest is paid annually and
the bonds have 10,000 par value, 8% coupon rate and required rate of return of
9%.what is the current market price of these bonds? [3 Marks]
c) Lafarge has another bond issue outstanding with an annual coupon rate of 8%
paid semi-annually and 7 years remaining to maturity. The par value is
10,000.Determine the current value of the bond if market conditions justify a 14%,
compounded semi-annually, required rate of return. [3 Marks]
d) Muunga deposits a K3, 000 at the end of every 3 months into a savings account
that pays interest at 8% compounded quarterly. How much in money is in his
account after 4years? [3 Marks]
e) Furn-City Zambia Limited sells television sets for K7, 800, you may purchase it by
paying K800 down and the balance in monthly instalments for 2 years. Find the
monthly instalment if Furn-City charges 15% compounded monthly. [3 Marks]
[Total: 20 Marks]

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QUESTION FOUR

Rainbow Company, a medium-sized company specialized in the manufacture and

distribution of equipment for babies and small children, is evaluating a new capital
expenditure project. In a joint venture with another separate company. It has invented
a remote controlled pushchair, one of the first of its kind on the market. It has been
unable to obtain a patent for the invention, but is sure that it will monopolize the market
for the first three years. After this, it expects to be faced with stiff completion.

The details are set out below:

1. The project has an immediate cost of K2, 100,000

2. The company’s cost of capital is 8%

The expected cash flows from year one through to year five as follows

Year1 Year2 Year3 Year4 Year5

K775,000 K775,000 K775,000 K325,000 K325,000

Required:

a) Calculate the NPV of the project at the company’s required rate of return. State
whether the project is financially viable? [4 Marks]
b) Calculate the projects Internal Rate of Return (IRR) to the nearest percent.
[6 Marks]
c) Calculate the projects simple payback period (PBP) [3 Marks]
d) Calculate the profitability index (PI) and comment on the projects viability
[3 Marks]
e) Calculate the project Accounting rate of return (ARR) [4 Marks]
[Total: 20 Marks]

QUESTION FIVE

a) A company has just paid a K2.00 dividend per share and dividends are
expected to grow at a rate of 6% indefinitely. If the required return is 13%, what
is the value of the stock today? [2 Marks]
b) The last dividend paid by C.E.C Company was K1.34. C.E.C’s growth rate is
expected to be a constant 5 percent for 2 years, after which dividends are expected

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 to grow at a rate of 10 percent forever. Klein’s required rate of return on equity is
12 percent. What is the current price of C.E.C’s common stock? [8 Marks]
c) While Muunga Sishumba was a student at Copperbelt University, he borrowed
K50, 000 in student loans at an annual interest rates of 9%.if Muunga Sishumba
repays K750 a month, and how long to the nearest month will it take him to repay
the loan? [3 Marks]
d) A consumer borrows 100,000 to be repaid in monthly instalments over one year at
12% compounded monthly.Calculate the monthly payment and construct
the amortization schedule to for the first FOUR months. [7 Marks]
[Total: 20 Marks]

END OF EXAMINATION PAPER

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 FORMULAS

Vb=I(PVIFA r,t)+MV(PVIF r,t) YTM=I+[(MV-Vb)/N]/[(2Vb+MV)/3]

PVa=a(PVIFA r,t) YTC=I+[(CP-Vb)/N]/[(2Vb+CP)/3]

PVa = a (1- 1/(1+r)t)/r P0= D0(1+g)/Ks-g = D1/ks-g

FVa= a(FVIFA r,t) (Pt = Dt(1+g)/Ks-g= Dt+1/ks-g)

FVa= a ((1+r) t – 1)/r D1= D0(1+g)

CY=I/price P0 = DivP / kP

FV=PV (1+r)t KS = ( D1 / P0 ) + g

FV=PV (FVIF r,t) KS =Rf + (ERm–Rf) β

PV = FV (PVIF r,t)

IRR = A1 + NPV1 x (B2 - A1)

(NPV1 – NPV2)

Expected rate of return = ER =  Pi r i

Standard deviation =  =  (r - ER )
2
i Pi .


Coefficien t of variation (CV) = .
ER

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