QUESTION 1 [30 MARKS Namibia Breweries Limited (NBL) is the only home grown Namibian brewery, listed on the Namibian Stock exchange (NSX) for 20 years, with a portfolio of alcoholic and non-alcoholic brands representing the craft, premium, international premium and mainstream beverage categories. Despite current economic challenges, NBL has been able to retain its price position without any negative impact on volumes. Despite its dominant market position in Namibia, NBL has avoided complacency, continuously launching new products, new packaging and achieving sustainable efficiencies in its operations. The Namibian market remains NBL's most attractive growth opportunity, which will be exploited through the newly structured relationship with Heineken NBL is considering whether to accept one of two major new investment opportunities, Project 1 and Project 2. Each project would require an immediate outlay of N$ 400 000 and NBL expects to raise sufficient funds to undertake one of the projects only. The Directors of NBL believes that the returns from existing activities and from the new projects will depend on which of the three economic environments A, B or C prevails during the coming year. They estimate returns for the coming year and the probabilities of the three possible environments as follows: Economie environment B Probability of environment 30% 40% 30% % % % -5 Returns from Project ! Returns from Project 2 Aggregate returns from existing portfolio of projects 25 0 -10 25 17.3 20 30 The Directors of NBL are of the opinion that the risk and returns per NS of market value of their existing activities are similar to those of the stock market as a whole, including their dependence on whichever economic environment prevails. The current rate of return on short-term government bonds and Treasury Bills is 10% per annum MARKS 12 REQUIRED: a) Calculate the amount of risk for (i) Projects 1, (ii) Project 2, and for (iii) The existing portfolio b) Calculate the covariance for: (i) Projects 1 with the market, and (ii) Project 2 with the market c) calculate the beta for (1) Project 1, and (ii) Project 2 6 6 4 d) Calculate the required returns for Projects 1 and 2 using the Capital Asset Pricing Model (CAPM) 2 h) Which, of either, of the two proposed projects should be accepted in terms of the portfolio theory and the Capital Asset Pricing Model (CAPM)? Justify your answer TOTAL MARKS 28