SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT

AFIN 209 –CORPORATE FINANCE ASSIGNMENT

PUBLICATION DATE: THURSDAY 13TH FEBRUARY 2020

DUE DATE: MONDAY 30 TH MARCH 2020

SUBMISSION INSTRUCTIONS

(1) Read All Parts of a Question carefully before attempting a question

(2) All parts of the question must be attempted.

(3) Workings must be shown and labeled clearly.

(4) Answers must be word processed/ typed and submitted in HARD COPY on or
before the due date stated above. Adhere to the due date for submitting the
assignment. In case you have challenges that may affect timely submission of this
assignment, please inform the lecturer in writing before the due date .Marks will be
deducted for late submission of the assignment.

(5) This is an individual assignment. YOU ARE STRONGLY ADVISED TO AVOID

CONVERTING THIS ASSIGNMENT INTO A GROUP ASSIGNMENT. Marks will be
deducted for assignments done and submitted like group work.

(6) On the front cover of your answer book, indicate your name, student number, course
details (course code and course name) and your programme of study.

Lecturer’s contact details:

Name: Dr Agape Kapasa

Mobile Phone Number: +260 96 310 8227

Email: [email protected]

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SECTION A

This question is compulsory.

CASE STUDY

The Lusaka stock exchange has various Capital raising instruments and entities that
could assist organizations and individuals with creating wealth and an investment
culture .The advantage of entities that are listed is that they are able to raise funds for
businesses, it gives an opportunity to broaden shareholding, it also helps improve the
profile of the businesses.

Current news of the day on the market, indicates the following:

In 15 trades recorded today, 369,669 shares were transacted, yielding a market

turnover of K2, 924,320. Trading activity was recorded in SCBL, ZABR, ZMBF and
ZNCO. The LuSE All Share Index (LASI) maintained its close of 4,258.14 points as
there were no share price movements. The market closed on a capitalization of K56,
529,102,118 including Shoprite Holdings and K22, 289,896,138 excluding Shoprite
Holdings.

Due to the current market indicators your investment group, that you have created with
30 students called Eagle eye investments,have decided to invest in a company listed on
the Lusaka stock exchange but you are uncertain if the return will be worthwhile, your
group has therefore decided to make the desion based on the Net present value of
the project.

Information on Marble stone ltd

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The company estimates that its cost of capital is 10%. It is considering whether to invest
in Marble stone , which has the following cash flows and will make the decision on the
basis of the net present value of the project:

Year Cash flows in (K’ Millions)

o (100,000)

1 60,000

2 40,000

3 30,000

4 20,000

Eagle view investments hopes to recoup its investment and payback any amounts owed
to external stakeholders within 3 years, Equipment and Machinery owned by Marble
stone is deemed to have zero residual value, life span of this Machinery and Equipment
is 4 years, current value of this Machinery and Equipment is K600, 000

QUESTION ONE (1)

a) Should the project be undertaken based on Net Present Value (NPV)?

(10 marks)

b) Calculate the Payback Period (PBP) of the investment in months.

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 (.5 marks)
c) Calculate the Accounting Rate of Return (ARR) for this project.
(.5 marks)
d) Calculate the Internal Rate of Return (IRR) for the project. (5 Marks)

e) As the Financial Manager of your Investment group (Eagle Eye) the group
has asked if it is possible to diversify your portfolio by investing in other
instruments on the Lusaka stock exchange but would like to know the level of
risk for each type ,that is if they are high risk, medium risk or low risk
,indicate for each type the level of risk you would give to each and why

Type of Instrument Level of Risk?

Equity Share (i) ?
Preference share (ii) ?
Corporate bonds (iii) ?
Government bonds (iv) ?

( 5 Marks )

QUESTION TWO (2)

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Gordon's Wealth Growth Model was initially developed by Gordon and Shapiro in 1956,
and later refined by Gordon in 1962, based on the premise that dividends grow at a
constant rate in perpetuity. Nonetheless, this assumption does not hold in reality
because projections of dividends cannot be made for an indefinite period; hence,
various versions of the dividend discount model have been developed. These models
were developed based on different assumptions concerning future growth. The simplest
form of the dividend discount models is Gordon's Wealth Growth Model and it is used to
value a stock of a company that has stable growth and pay dividends regularly (Stowe
et al., 2007; Damodaran, 2002)

Since the Global Financial Crisis (GFC) in mid-2008, capital has been more difficult to
access. Mining projects must contend with projects from other industries for scarce
capital. A decision to invest available capital in mineral projects requires that valuation
be conducted to assess the expected return on the projects.

Based on this information you have been requested to use the Gordon’s growth Model
to
Analyze if we should or should not invest in two Mining companies that have been
operating in Zambia for the current 3 years, which Mining entity should we invest in ? .

(a) Mulenga Mine share price is K8.20. The company has just paid an annual dividend
of K0.70 per share, and the dividend is expected to grow by 3.5% into the
foreseeable future. The next annual dividend will be paid in one year’s time.
Calculate the cost of capital using the Gordon Growth Model ( 5 Marks )

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(b) Katongo share price is K5.00. The next annual dividend will be paid in one year’s
time and dividends are expected to grow by 4% per year into the foreseeable future.
The next annual dividend is expected to be K0.45 per share. The next annual
dividend = d (1 + g). Calculate the cost of capital using the Gordon Growth Model ( 5
Marks)

TOTAL MARKS 40

SECTION B

As an International Investor, it is important for you to read the latest financial and
business news that is occurring around the world. After reading the article below,
answer the questions that follow

Business article :
Capital costs rise on sustainability concerns

An intensifying investor focus on sustainable investing and the climate emergency is

impacting the oil and gas sector

Investors are increasingly focused on the threat of global warming and the need to
rapidly decarbonize the global economy, with up to $118tn of funds committed to
making climate risk disclosures by 2020.  

And they are responding by divesting oil and gas holdings, or, at a minimum, fully
integrating sustainability into their investment process, driving an incrementally negative
view of the sector.  Consequently, the sector's weighted average cost of capital (WACC)

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has risen, causing a valuation derating, reduced capital availability and low market
liquidity

. 

Question one (1)

After reading this article you have been requested to advice an investment group if they
should or should not invest in a gas and oil business located in Nigeria, your opinion
that you will render will be based on the WACC .

Calculate the WACC and give your opinion using the information given below.

a) Vision oil and Gas Company has 10 million shares each with a value of $4.20,
whose cost is 7.5%. It has $30 million of 5% bonds with a market value of 101.00
and an after-tax cost of 3.5%. It has a bank loan of $5 million whose after-tax cost is
3.2%. It also has 2 million 8% preference shares of $1 whose market price is $1.33
per share and whose cost is 6%.

Calculate the WACC ( 5 Marks )

b) Article
Assessment of Zambia’s capital market integration into the world market is important
ingredient when analyzing cost of capital using CAPM. Proponents and supporters of
CAPM appear to suggest that it has international application because they are of the
opinion that global capital markets are significantly integrated. Therefore, they propose

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the use of a global or international capital asset pricing model, popularly known as the
ICAPM (O’Brien, 1999; Stulz, 1995 and 1999; Schramm and Wang, 1999) to estimate
return. This implies that international investors can enter and leave any market
anywhere in the world with reasonable certainty and a minimum transaction costs.
However, application of the global version of the capital asset pricing model in emerging
capital markets has proved impractical and controversial, since these markets are highly
segmented and have country specific barriers that minimize their integration to the world
markets (Bekaert, 1995; Harvey, 2000; Bekaert and Harvey 2002; Chaieb and Errunza,
2007; etc.)

Answer the following questions on CAPM

1. The risk-free rate of return is 4% and the return on the market portfolio is 8.5%.
What is the expected return from shares in companies X and Y if:
i) the beta factor for company X shares is 1.25 ( 2 Marks )
ii) the beta factor for company Y shares is 0.90 ( 2 Marks)

2. The return on shares of company A is 11%, but its normal beta factor is 1.10.
The risk-free rate of return is 5% and the market rate of return is 8%. Calculate
the abnormal return (alpha factor). ( 6 Marks )

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 QUESTION TWO ( 2 )

Attempt All

a) Merlo, Inc. maintains a debt-equity ratio of .40 and follows a residual dividend policy.
The company has after-tax earnings of $1,600 for the year and needs $1,400 for
new investments. What is the total amount Merlo will pay out in dividends this year?

( 3 Marks )

b) You recently purchased a stock that is expected to earn 12 % in a booming

economy, 8 % in a normal economy and lose 5 % in a recessionary economy. There
is a 15 % probability of a boom, a 75 % chance of a normal economy, and a 10 %
chance of a recession. What is your expected rate of return on this stock?

( 3 Marks )

c) Shares are currently selling for $4.4625. At the beginning of the year you bought
them for $4.25 and during the year a dividend of 21.25 cents per share was paid.
What is the return?

( 3 Marks )

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d) Which one of the following stocks is correctly priced if the risk-free rate of return is
2.5 percent and the market risk premium is 8 percent?

( 3 Marks )

STOCK BETA EXPECTED

RETURN
A .68 8.2%
B 1.42 13.9%
C 1.23 11.8%
D 1.31 12.6%
E .94 9.7%

e) Using the following information, calculate the portfolio beta and expected return:

Event Wealth Expected Beta

Invested Return
A K10,000 8% .80
B K20,000 12% .95
C K30,000 15% 1.10
D K40,000 18% 1.40

( 3 Marks )

TOTAL 30 MARKS

TOTAL PAPER 70 MARKS

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