SCHOOL OF BUSINESS

BBF 314: CORPORATE FINANCE

REVISION

QUESTION ONE: 20 MARKS

a) A company offers annual payments of K100 at the end of each year for the next three years. Calculate its
present value and the present value of an annuity due discounted at 10%. [4 marks]

b) Write brief notes on any 2 legal business structures. [10 marks]

c) Calculate the future value of an annuity for K200 paid at the end of each year for 2 years assuming interest is
compounded semi-annually at 10%. [3 marks]

d) A pension fund requires paying an annual dividend to its equity shareholders of K200. The required rate of
return on common stock is 11%. find the value of this stock today. [3 marks]

QUESTION TWO: 20 MARKS

a) At the beginning of last year you invested K4,000 in 80 shares of the Mpande Corporation. During the year
Mpande paid dividends of K5 per share. At the end of the year you sold the 80 shares for K59 a share. Compute
your total HPY on these shares and indicate how much was due to the price change and how much was due to
the dividend income. [7 marks]

b) Mpande corporation wishes to evaluate its’ business viability under the following conditions:
Economic Conditions Probability Rate of Return
Strong economy, no inflation 0.15 0.20
Weak economy, above average inflation 0.15 -0.20
No major change in economy 0.70 0.10
Compute the expected return. [3 marks]

c) Mpande Investments plc has ordinary shares in issue that have a current market value of K2.20. The annual
dividend to be paid by the business in future years is expected to be K0.40. What is the cost of the ordinary
shares to the business? [2 marks]
d) The cost of equity can be estimated using several different methods or models. Write brief notes on any two of
the following and stating the formula for each.
i. The dividend valuation model [4 marks]
ii. The dividend growth model [4 marks]
iii. The capital asset pricing model. [4 marks]

QUESTION THREE: 20 MARKS

QUESTION FOUR: 20 MARKS

1
a) From the information given below, compute the Arithmetic and Geometric means. [5 marks]
Year BV EV HPR HPY
1 100.0 115.0 1.15 0.15
2 115.0 138.0 1.20 0.20
3 138.0 110.4 0.80 -0.20
b) A company has a target accounting rate of return of 20% and is now considering the following project.

Capital cost of asset K80,000

Estimated life 4 years

Estimated profit before depreciation K

Year 1 20,000

Year 2 25,000

Year 3 35,000

Year 4 25,000

The capital asset would be depreciated by 25% of its cost each year, and will have no residue value.

i. Fill in the blanks below and show your working. [8 marks]

Year Profit After Depreciation Mid-Year Book Value ARR in the Year (%)
(K) (K)
1 0 ? 0
2 ? 50,000 10
3 15,000 ? 50
4 5,000 ? 50

ii. Assess whether the project should be undertaken. Clearly show your working. [7 marks]

QUESTION FIVE: 20 MARKS

With examples for each and clearly stating the pros and cons, discuss the two broad investment appraisal techniques.
[20 marks]

THE END