COURSE CODE: BFI 220

COURSE NAME: INTRODUCTION TO FINANCE CAT II

Due on 13TH November 2023

INSTRUCTIONS: PLEASE READ THEM CAREFULLY

1) You are required to do this assignment in Groups of THREE.

2) The assignment is due on Monday 13TH November 2023 @ 9 AM. You will hand it to me in class.
3) Late submission will NOT be accepted. A zero will be duly awarded if the assignment is not
submitted as per note number (2).
4) All workings should be clearly typed and shown.
5) Choose a group leader for handing over the assignment to me.

QUESTION ONE

a) Define the term capital markets

b) Discuss the roles of capital markets
c) Give some of the reasons Kenya’s capital market is undeveloped.
d) What do you understand by the term efficient markets hypothesis?
e) Using examples, describe the Gordon’s dividend model used for share valuation.

f) The following information relates to the forecast returns of securities A and B and their
probabilities during the financial year ending 31ST December 2022:

Probability Security Y Security Z

0.2 10% 8%
0.1 12% 10%
0.35 8% 7%
0.05 15% 12%
0.15 14% 11%
0.15 9% 8%
Required:

(i) The expected returns on securities Y and Z (4 Marks)

(ii) The standard deviation of securities Yand Z (6 Marks)
(iii) Based on part (i) and (ii), which security would you recommend an investor to buy and
why? (4 Marks)

QUESTION TWO

Hena is the Finance Director of a local company that specializes in processing steel. The company is planning
on an upgrade on one its major machines. The projected returns for the three machines are as follows:

Machine X Machine Y Machine Z

Initial Cost Outlay 4,000,000 3,500,000 5,000,000

Salvage Value (at end of 150,000 80,000 250,000
year 4)

Forecasted Returns:
Year 1 400,000 350,000 550,000
 2 600,000 480,000 450,000
3 2,500,000 1,100,000 2,800,000
4 2,000,000 1,600,000 2,600,000

Discounting Rate 8.50% 9.20% 7.45%

He has come to you for advice on which plant to buy. Evaluate the three projects using

a) Present Value
b) Net Present Value
c) Payback Period
d) Required Rate of Return
e) Profitability Index.

QUESTION THREE

Monicah is in permanent and stable employment. She is planning on taking a loan for putting up a house and
buying a car Two local banks have approached her to take a loan and she needs your help in deciding which
loan is affordable. The terms are as follows:

Bank A Bank B
Loan amount 3,500,000 3,500,000
Loan processing fee 0.75% (on the loan amount) 0.85% (on the loan amount)
Loan insurance 1.5 % (on the loan amount) 0.95% (on the loan amount)
Loan interest 12.25% 11.75%
Loan term 8 years 8 years

Using the Microsoft Excel spreadsheet, and for the two options, prepare a loan amortization schedule, showing:

a) The loan payment for each period (should be equal over the life of the loan)
b) The total interest paid for each option.
c) If Monicah makes a bullet payment at the beginning of year 5 of Sh. 800,000, will the repayment
reduce? By how much? Show all your workings.