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CORPORATE FINANCE II EXAM FOR NOV 2015 DR G MUPONDA

SECTION A
QUESTION 1 COMPULSORY [40 MARKS]
i.

On the 3rd of May, 2015 you deposit $750 into a bank account and withdraw it on the 9th
of October the same year. How much will you receive if the bank is paying a simple
interest rate of 17.87 % per year? (4 marks)

ii.

You deposit $12 000 into Barclays bank at an interest rate of 20% per year compounded
daily. After 3 months you withdraw $6 000 from this account and deposit the money into
CBZ at 25% per year, compounded monthly. You close both accounts 9 months later.
How much do you receive? (4 marks)

iii.

At what interest rate (compounded quarterly) would you need to invest $450 for two
years if it is to accumulate to $650 by the end of that period? (3 marks)

iv.

You decide to save an amount of $10 000 by seeding $3 500 today in an investment that
pays an interest rate of 9.65% per year, compounded weekly? How long will it take you
to achieve your goal? (3 marks)

v.

Jeffrey is required to pay for the purchase of a car through installments of $250 per
month for five years. The payments will be made at the beginning of each month. The
finance charge on this arrangement will be 6.43% per year with monthly compounding.
Calculate the total purchase price of the car under this arrangement (5 marks).

vi.

A car dealership is offering a car on hire purchase at $370 per month for 7 years. The
payments will be made at the beginning of each month. The finance charge is 9.22% per
year with monthly compounding.
What should be the cash price for this car? (5 marks)

vii.

A bank offers its loans at 3.45% per year compounded daily. What is the effective annual
interest rate on the banks loans? (3 marks)

viii.

A firm has in issue 9.53% irredeemable debt with a nominal value of $1 000 and a
current market value of $1265.56. The coupon is due shortly. The corporate tax rate
applicable to the firm is 32%.
Calculate the cost of the debt to the company (4 marks)

CORPORATE FINANCE II EXAM FOR NOV 2015 DR G MUPONDA

ix.

An investor buys a security at $100. The value of the security will grow at a continuously
compounded rate of 3.72% per year. What will be the value of the security at the end of 7
months? (3 marks)

x.

Construct an amortisation schedule (THE FIRST 6 LINES ONLY) for a 10-year loan of
$100 000 that is payable in quarterly installments. The interest rate is 12.87% per year,
compounded monthly (6 marks).

SECTION B
ANSWER ANY THREE (3) QUESTIONS FROM THIS SECTION

QUESTION 2 [20 MARKS]


2(a) A company borrows $100 000 using 20-year bonds with a par value of $1 000 and a coupon
rate of 7.26% per year, payable semi-annually. The trustee requires the company to set up a
sinking fund for the redemption of the bonds. The company will make quarterly deposits into the
fund and these deposits will be invested at 8.54% per year with monthly compounding.
Required:
i.
ii.
iii.

Determine the size of each deposit (2 marks)


Construct a sinking fund schedule (the first four lines only) (6 marks).
Calculate the annual cost of servicing the loan (2 marks).

2(b) Juliet borrowed $1 700 six months ago at an interest rate of 7.34% per year compounded
monthly and $1 300 four months ago at an interest rate of 8.67% per year compounded weekly.
The first loan is due in three months from now and the second loan is due in eight months from
now. Her sister also borrowed $1 200 from the same bank three months ago at an interest rate of
8.32% per year, compounded quarterly. This loan is due in six months from now. Juliet decides
to take over her sisters loan and negotiates with the bank to pay off all the loans as follows: she
will pay 30% of the total owed in nines time from now, 50% in twelve months and the balance
in fifteen months from now. The bank agrees on condition that a new interest rate of 10.18% per
year, compounded monthly is to be applied on all extended obligations.
What will be the size of each of Marys three payments? (10 marks)

CORPORATE FINANCE II EXAM FOR NOV 2015 DR G MUPONDA

QUESTION 3 [20 MARKS]


3(a) The following information relates to a bond issued by X Ltd.:

Annual coupon, 14.32% per year, payable semi-annually;


Par value, $1 000;
Years to maturity, 9 years;
Current market value, cum.int. , $1200

Required:
Calculate the annual yield on the bond (8 marks)
3(b) Calculate the value of a 20-year bond that is currently trading at a yield of 9.81% per year.
The bond has 11 years to maturity, a par value of $1000 and a coupon rate of 7.89% pa, payable
semi-annually (6 marks).
3(c) The equity of Mdala Ltd is trading at a beta coefficient of 1.2. The Treasury Bill Rate is 9%
per year and the average rate of return on the market index is 16%. The companys equity was
reported at $14 million and its net profit after tax was reported at $2.5 million. A dividend of 10
cents per share was paid. The company has 10 million shares in issue.
Calculate the intrinsic value of the companys shares (6 marks)

QUESTION 4 [20 MARKS]


4(a) The following projects have been presented to you for consideration:
PROJECT A

PROJECT B

YEAR CASH FLOW ($)

YEAR CASH FLOW ($)

- 4 500

- 7 000

- 2 100

1-5

2 500

2 000

3 000

5 000

The cost of capital for both projects is 9.17%.


Required:
For each project, calculate the following:
3

CORPORATE FINANCE II EXAM FOR NOV 2015 DR G MUPONDA

i.
ii.
iii.
iv.

Payback period (4 marks);


Net Present Value (4 marks);
Internal Rate of Return (4 marks);
Modified Internal Rate of Return (4 marks).

4(b) On the basis of your calculations, which of the two projects in 4(a) would you accept?
Provide adequate reasons for your choice (2 marks).
4(c) Briefly explain why we have to modify the IRR of a project (2 marks).

QUESTION 5 [20 MARKS]


5(a) Briefly explain the meaning of the following terms as they apply to the issuing of shares (8
marks):
i.
ii.
iii.
iv.

Primary market
Secondary market
Initial public offer.
Seasoned offer

5(b) Briefly describe the two sources of ordinary equity and explain why they differ in their
cost to the business (6 marks).
5(c) Briefly explain the rationale behind Gordons divided growth model and state the two
assumptions that support it (6 marks).

END OF EXAMINATION