a .Define Covariance. (2 marks)

b. Identify and explain two shortcomings of the internal rate of return method of investment evaluation. (4 marks)

c. Lesedi a young farmer, has two projects with the following cash flows:

PROJECT	Y0	Y1	Y2
A	-4000	2500	3000
B	`-2000	1200	1500

i. Find the Payback periods for the two projects. (2 marks)

ii. If the discount rate is 10%, calculate the NPV of the projects. (2 marks)

a.Define what is meant by a pure discount bond. (2 marks)

b. An Investment Advisor is valuing Pick and Pay by discounting the cash flows using the cost of capital derived from a beta of 0.85. An Analyst at Motswedi Securities had provided 0.85 as the average industry beta for the Retail. Explain conditions under which you will recommend for beta of 0.85 to be used and the conditions in which you will be against its use. (6 marks)

c. Raditsebe, an Analyst at Barclays Bank Investment Division, has been monitoring the performance of stocks of Furnmart, Metsef, and Choppies and has compiled the following;

	Beta	STD	Forecast to December 2016
			Dividend	Share price
Furnmart	0.45	35%	P0.50	P45
MetSef	1.45	40%	0	P75
Choppies	-0.20	40%	P1.00	P20

The markets standard deviation is 18%. Using the risk-free rate of 2.0% and an expected market return of 9.5%, what is the expected return of each stock? (9 marks)

d. Based on your calculations above describe the relationship between a firms return and its beta. (3 marks)

a. Discuss two direct costs of bankruptcy. (5 marks)

b. Consider the returns for Firm A and the market returns under the following economic conditions:

	FIRM A	MARKET
Depression	20%	10%
Recession	-4%	-2%
Normal	8%	3%
Boom	12%	5%

The value of the firm is known with P40 million debt and P60 million equity. This firm has 60 shares outstanding all held by management:

i. What is the expected return for Firm A and the market? (4 marks)

ii. Calculate the covariance between the returns of Firm A and the market return. (4 marks)

iii. Calculate the variance of the markets return. (4 marks)

iv. What will be the estimated beta for this firm? (3 marks