Consider a 20year project with the following portion of cash flows.

Years

Cash flows

1-6 years

4,000 p.a.

7-10 years

5,000 p.a.

11-17 years

8,000p.a.

18-20 years

12,000 p.a.

Suppose the cost of capital is 12%. The annuity between years 11-14 is received at the beginning of each period. Calculate the present value of the differential annuity. 

(10Marks)

What economic advantages are created by the existence of 

Primary markets (5Marks)

ii) Secondary markets. (5Marks)

QUESTION TWO

The capital structure of a company consist of the following items

Sh.

3m ordinary share

30m

Retained Earnings

20m

1m 10% pref. shares

20m

0.2m 6% debentures

30m

100m

The current market value of the company’s ordinary shares is sh.30. The expected dividends per share at the end of the year is sh.1.20.  

The average growth rate in dividends has been 10% and this is expected to be maintained in the foreseeable future. The debentures of the company have a face value of sh. 150 however they currently sell for 100/= in the market. The debentures will mature in 100 years’ time. The preference shares of the company still sell at their par value. Assume a tax rate of 30%. Calculate the weighted average cost of capital for this company. 

(10Marks)

A debenture is denoted as a 5 years 14% ksh. 3000. The debenture is redeemable at par. If the cost of capital is 11%, determine the value of this debenture.