SECTION A

This question is compulsory. CASE STUDY

The Lusaka stock exchange has various Capital raising instruments and entities that could assist organizations and individuals with creating wealth and an investment culture .The advantage of entities that are listed is that they are able to raise funds for businesses, it gives an opportunity to broaden shareholding, it also helps improve the profile of the businesses.

Current news of the day on the market, indicates the following:

In 15 trades recorded today, 369,669 shares were transacted, yielding a market turnover of K2, 924,320. Trading activity was recorded in SCBL, ZABR, ZMBF and ZNCO. The LuSE All Share Index (LASI) maintained its close of 4,258.14 points as there were no share price movements. The market closed on a capitalization of K56, 529,102,118 including Shoprite Holdings and K22, 289,896,138 excluding Shoprite Holdings.

Due to the current market indicators your investment group, that you have created with 30 students called Eagle eye investments,have decided to invest in a company listed on the Lusaka stock exchange but you are uncertain if the return will be worthwhile, your group has therefore decided to make the desion based on the Net present value of the project.

Information on Marble stone ltd

The company estimates that its cost of capital is 10%. It is considering whether to invest in Marble stone , which has the following cash flows and will make the decision on the basis of the net present value of the project:

Year	Cash flows in (K Millions)
o	(100,000)
1	60,000
2	40,000
3	30,000
4	20,000

Eagle view investments hopes to recoup its investment and payback any amounts owed to external stakeholders within 3 years, Equipment and Machinery owned by Marble stone is deemed to have zero residual value, life span of this Machinery and Equipment is 4 years, current value of this Machinery and Equipment is K600, 000

QUESTION ONE (1)

1. Should the project be undertaken based on Net Present Value (NPV)?

(10 marks)

2. Calculate the Payback Period (PBP) of the investment in months.

(.5 marks)

3. Calculate the Accounting Rate of Return (ARR) for this project.

(.5 marks)

4. Calculate the Internal Rate of Return (IRR) for the project. (5 Marks)
5. As the Financial Manager of your Investment group (Eagle Eye) the group has asked if it is possible to diversify your portfolio by investing in other instruments on the Lusaka stock exchange but would like to know the level of risk for each type ,that is if they are high risk, medium risk or low risk ,indicate for each type the level of risk you would give to each and why

Type of Instrument	Level of Risk?
Equity Share (i)	?
Preference share (ii)	?
Corporate bonds (iii)	?
Government bonds (iv)	?

( 5 Marks )

QUESTION TWO

Gordon's Wealth Growth Model was initially developed by Gordon and Shapiro in 1956, and later refined by Gordon in 1962, based on the premise that dividends grow at a constant rate in perpetuity. Nonetheless, this assumption does not hold in reality because projections of dividends cannot be made for an indefinite period; hence, various versions of the dividend discount model have been developed. These models were developed based on different assumptions concerning future growth. The simplest form of the dividend discount models is Gordon's Wealth Growth Model and it is used to value a stock of a company that has stable growth and pay dividends regularly (Stowe et al., 2007; Damodaran, 2002)

Since the Global Financial Crisis (GFC) in mid-2008, capital has been more difficult to access. Mining projects must contend with projects from other industries for scarce capital. A decision to invest available capital in mineral projects requires that valuation be conducted to assess the expected return on the projects.

Based on this information you have been requested to use the Gordons growth Model to

Analyze if we should or should not invest in two Mining companies that have been operating in Zambia for the current 3 years, which Mining entity should we invest in ? .

1. Mulenga Mine share price is K8.20. The company has just paid an annual dividend of K0.70 per share, and the dividend is expected to grow by 3.5% into the foreseeable future. The next annual dividend will be paid in one years time. Calculate the cost of capital using the Gordon Growth Model ( 5 Marks )

2. Katongo share price is K5.00. The next annual dividend will be paid in one years time and dividends are expected to grow by 4% per year into the foreseeable future. The next annual dividend is expected to be K0.45 per share. The next annual dividend = d (1 + g). Calculate the cost of capital using the Gordon Growth Model ( 5 Marks)