Instructions: SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT AFIN 209: Corporate Finance & Financial Modelling ASSIGNMENT (2) Due: Monday, 9 th October 2017 by 16:30 hours 1. Read all the Questions carefully and thoroughly. 2. Answer ALL Questions to the best of your ability. 3. You must show your FULL workings for EACH question, including multiple choice questions. 4. Refer to the course Slides, External Material and Textbook for guidance All work must be Harvard Referenced!! 5. NO ASSIGNMENTS SUBMITTED AFTER THE CUTOFF TIME WILL BE CONSIDERED FOR MARKING! Neither ZESCO nor Courier services will be an excuse for late submission. 6. To ensure that you are not penalised for late submission, due to delays in delivery etc., you may email your Assignment to: mo.simwami@gmail.com before the original deadline. You will STILL be required to submit a HARD COPY for your assignment to be marked. N.B. Late Assignments will ONLY be accepted with a late penalty and only till the cut-off date. 10 th October 5% 16 th October 25% 11 th October 10% 17 th October 30% 12 th October 15% 18 th October 35% 13 th October 20% 19 th October 50% NO ASSIGNMENTS WILL BE ACCEPTED AFTER THE 19 th OF SEPTEMBER, REGARDLESS OF YOUR EXCUSE. GOOD LUCK
QUESTION ONE A. Mention TWO (2) key differences between a Future transaction and a Forward transaction. [2 marks] B. According to Dividend policy theory, define the Clientele effect and what bearing it has over decision making. [3 marks] C. Illustrate the relationship between risk and return. [5 marks] D. Explain the difference between Annual percentage rate and Effective Annual Rate (EAR). [4 marks] E. In order to purchase new machinery, a firm borrows K65,000 from Bank BigBucks at 12% compounded quarterly. This loan is to be repaid in equal quarterly instalments at the end of each period over the next 6 years. i. Evaluate how much each annual payment will be? [4 marks] ii. Set up an amortization schedule for a K65,000 loan to be repaid in equal instalments at the end of each year, of the next 2 years.[7 marks] [TOTAL: 25 MARKS] QUESTION TWO A. Identify a locally operating firm who would be heavily affected by a fluctuating exchange rate and explain the effect these fluctuations would have on the firm. [4 marks] B. Given the following exchange rates, calculate the ZMW/CHF exchange rate. 0.1096 USD/ZMW and 1.4860 CHF/USD [4 marks] C. Which market are bonds typically traded in? [1 mark] D. If a bond issued at par was selling for K1, 000 and paid a coupon of K110. Find the Current Yield (CY)? [2 marks]
E. Four years ago, Coca-coal Mining Company issued some 15 year bonds with 10% coupon rates and 10% call premium. You have called these bonds which originally sold at their face value of K1,000. i. Compute the Total yield realized by the investors who purchased the bonds when they were issued and comment on whether these investors would be happy with the calling of the bonds? [6 marks] F. The last dividend paid by Klein Company was K1.34. Klein s growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected 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 Klein s common stock? [8 marks] QUESTION THREE A. ChilleBomb Ltd. is estimating its WACC. The company has collected the following information: Its capital structure consists of 26 percent debt and 74 percent common equity. The company has 15-year bonds outstanding with a 9 percent annual coupon that are trading at par. The company s tax rate is 35 percent. The risk-free rate is 6.5 percent. The market risk premium is 6 percent. The stock s beta is 1.2. What is the company s WACC? [6 marks] B. The Coffee Shop Lounge has been presented with an investment opportunity that will yield cash flows of K30,000 per year in Years 1 through 4, K35,000 per year in Years 5 through 9, and K40,000 in Year 10. This investment will cost the company K150,000 today, and the firm s cost of capital is 10 percent. Assume cash flows occur evenly during the year. What is the payback period for this investment? [4 marks]
C. Lemonade Plc. is considering two projects to expand its product line. Projects A & B attract the following cash flows: Period CFA CFB 0-50,000-100,000 1 20,000 60,000 2 20,000 25,000 3 20,000 25,000 4 20,000 25,000 The opportunity cost of capital for A is 14 percent. The opportunity cost of capital for B is 10 percent. i. Calculate the NPV for each project. [4 marks] ii. Calculate the IRR for each project. [6 marks] iii. Which project(s) should be accepted in each of the following situations: 1. The projects are mutually exclusive and there is no capital constraint. [1 mark] 2. The projects are independent and there is no capital constraint. [1 mark] 3. The projects are independent and there is a total of K100,000 of financing for capital outlays in the coming period. [1 mark] iv. Explain why the cost of capital for A might be higher than for B. [2 marks] [TOTAL: 25 MARKS] QUESTION FOUR A. Explain to an investor why an optimal mix is favourable and what should be considered as an acceptable WACC percentage. [5 marks]
B. You are given the following estimates for Stock s A and B. State of Economy Probability A B Poor 0.25-5% -8% Normal 0.5 8% 10% Good 0.25 12% 22% i. What are the expected returns for stock s A and B respectively? [2 marks] ii. What are the standard deviations for stock s A and B respectively? [4 marks] iii. Explain to an investor which stock is riskier and why? [2 marks] B. You have decided to invest 40% of your wealth in McDonalds which has an expected return of 15% and a standard deviation of 15%, and 60% of your wealth in GE which has an expected return of 9% and a standard deviation of 14%. i. What is the expected return of your portfolio? [2 marks] ii. If the correlation between McDonalds and GM is 0.5, what is the standard deviation of your portfolio? [5 marks] iii. If you wanted an expected return of 13%, what percentage should you invest in McDonalds? [5 marks] END OF ASSIGNMENT 2 [TOTAL: 25 MARKS]
FORMULAS V b =I(PVIFA r,t)+mv(pvif r,t) CY=I/price PV a =a(pvifa r,t) FV=PV (1+r) t PV a = a (1-1/(1+r) t )/r FV=PV (FVIF r,t) FV a = a(fvifa r,t) PV = FV (PVIF r,t) FV a = a ((1+r) t 1)/r YTM=I+[(MV-V b )/N]/[(2V b +MV)/3] Expected rate of return = ER = Pi r i YTC=I+[(CP-V b )/N]/[(2V b +CP)/3] P 0 = D 0 (1+g)/K s -g = D 1 /k s -g Standard deviation = = 2 ( ri - ER ) P i. (P t = D t (1+g)/K s -g= D t+1 /k s -g) Coefficient of variation (CV) = ER. D 1 = D 0 (1+g) σ P 2 2 2 2 = w σ w σ 2w w Cov(R, R ) b a a b b a b a P 0 = Div P / k P K S = ( D 1 / P 0 ) + g K S =Rf + (ERm Rf) β