OAK UNIVERSITY

SCHOOL OF BUSINESS
CORPORATE FINANCE: BBF 314
SEP19 FT/PT E.O.T 1 TEST 1 HOUR

INSTRUCTIONS: ANSWER ALL.

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TOTAL MARKS: 50
1. .
a) Calculate the NPV and rate of return for each of the following investments. The
opportunity cost of capital is 18% for all four investments. [16 marks]
Investment
1 1000 1800
2 600 750
3 550 700
4 300 550

b) Which investment is most valuable and why? [2 marks]

2. With a flow chart, briefly explain the role of a financial manage. [4 marks]
3. Tollgate Mbewe contemplates on buying a land for K50, 000 and plans to build a resort with
an additional K80, 000 on the property. The land and the resort are estimated to be worth
K150, 000 next year. Suppose that common stocks with the same risk as this investment
offer a 9 percent expected return. Would you construct the play park? Why or why not?
Show your working. [5 marks]
4. Tinagwakale Ltd is expected to pay an end-of-year dividend of K7 a share. After the dividend
its stock is expected to sell at K98. If the market capitalization rate is 4%, what is the current
stock price? [2 marks]
5. Frustrated by what has famously come to be called “Mass media Toll gate”, Enoch stands on
a very thin line that should decide his fate. Bright, one of his close friends who seems to
understand the game theory behind BETWAY comes in with his honorary professorship in
betting and advises Enoch to try his chance. Without hesitation, Enoch quickly registers an
online Betway account and pumps in an initial K20 which, at his first attempt, miraculously
wins him a K950 000 from Betway. As one who claims to be a financial analyst, how should
Enoch invest the K950 000? There are four immediate alternatives.
i. Investment in local real estate, which Enoch judges is about as risky as the stock
market. The opportunity at hand would cost K950 000 and is forecasted to be worth
K1 million after one year.

1
 ii. A loan to Bright, who has for years aspired to open a car wash business near Long
Acres Mall. Bright has arranged a one-year bank loan for K650, 000 at 8%, but asks
for a K950 000 loan from Enock at 6%.
iii. Investment in one-year GRZ Treasury Bills yielding 5% as advertised by Bank of
Zambia.
iv. Investment in the stock market. The expected rate of return is 11%.
a) Which of these investments have positive NPVs? Show your working. [8 marks]
b) Which would you advise Enoch to take and why? [3 marks]
6. Mwinji Siazigele can purchase a tanker load of petrol delivered in Lusaka one year hence for
an outlay of k6 million. Unfortunately the net cash flow from selling the tanker load will be
very sensitive to the growth rate of the world economy:
slump normal boom
K7 K11 K17
a) What is the expected cash flow? Assume the three outcomes for the economy are
equally likely. [1 mark]
b) What is the expected rate of return on the investment in the project? [1 mark]
7. Her company has identified two more projects, B and C. Each will require a K4.5 outlay
immediately. The possible payoffs at year 1, are in millions:
slump normal boom
Project B K3.6 K5.2 K7.9
Project C 4 5.19 5.78

You have identified the possible payoffs to investors in three stocks X, Y, and Z:
Current price/share Payoff at year1
slump normal boom
X K90.65 K81.3 K99.1 K120
Y K37 K36.8 K40 K46
Z K11 K9 K12 K14

a) What are the expected cash inflows of project B and C? [2 marks]

b) What are the expected rates of return offered by stocks X,Y, and Z? [6 marks]
(All the best)

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