Dubai Bank (Uganda) Ltd is an all equity firm planning to expand into the United Republic of
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Question:
- Dubai Bank (Uganda) Ltd is an all equity firm planning to expand into the United Republic of Tanzania. The Bank is considering whether to invest directly in the country by building a branch. Expected payoff from the Tanzanian investment would depend on the future of its economy as follows; Status of Tanzanian Economy is represented by; E1, E2, E3, E4. Probabilities are; E1=0.1, E2=0.2,E3=0.5, E4=0.2, Expected Returns; E1=0.1, E2=0.2, E3=0.1, E4=0.2. The existing activities of the Bank are expected to generate an overall return of 30% with a standard deviation of 14%. The correlation coefficient of the bank's returns with returns of the Tanzanian investment is -30% (Negative 30%). The Bank's return has a correlation coefficient of 80% with the return on the market portfolio, while the Tanzanian investment has a correlation coefficient of -10% (Negative 10%) with the Ugandan market portfolio. The Beta coefficient for the Bank is 1.20 and the return on Ugandan 91-day Treasury Bill is 12%. Suppose the risk premium on the USE 20 Share Index is 15%, and assuming that Dubai Bank shares are correctly priced by the Uganda Securities Exchange. REQUIRED: (a) Determine the expected rate of return and standard deviation of the return from the Tanzanian investment. (b) Assuming the Tanzanian investment capital funding equal to 25% of the value of Dubai Bank's existing assets, determine the risk-return characteristics of the bank after the investment. (c) What effect will the implementation of the planned investment have on the Beta of the Bank?
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