UNIVl !

RSIT Y O F Z1MII ABWIJ

UNIVERSITY OF ZIMBABWE

JUNE 2022 EXAMINATION

MBA 50S: BUSINESS FfNANCE AND INVESTMENTS

BUSTNESS MANAGEMENT SCIENCES AND

Faculty:

ECONOMICS

Department: UNIVERSITY OF ZIMBABWE BUSINESS SCHOOL

Duration: JHO URS

Examiner: DR M. MASHJZHA

Authorized Materials: Non-Programmable Calculator

INSTRUCTIONS:
I. Thjs paper contains 6 (SIX) Questions .
2. Answer QUESTION ONE (I) and any other THREE (3) questions.
3. Stan each question on a new page.
4. This paper comprises of FIVE (5) printed pages.
5. Indicate the attempted questions in the space provided.
MENCE
NB: DO NOT TURN OVER THE QUESTION PAPER OR COM
WRITING UNTIL INSTRUCTED TO DO SO.

Page 1 of 5
 ARI\.S)
O MPULSOHY - 40 M
Q U F. sn oN O N E (C
a c<>mpallJ 's FillJl/1<:ia
l Rcporu
is nn e~ lr.JCI from
The following 5000 000
Ordinary iss ued shares
600 000
rves
Non diStriburablc Rese 400 000
Reta ined income 2 000 000
Shares
Irredeemable Preference I 000 000
Long Tenn Loans J 000 000

Dank Ovenfrall 600 000

Deferred TAXAtion
. .
nd ~f
Addilio11a/ /11/ormatlo
n:
S in is.sue and is currently paying a d1v1de
The Company has I 00
0 000 shllfC
I)
Th e $h4r eh olders required rate o f return IS
$2 pe.r share with a gr
owth rate of 5%.

ut rat io
24 ¾. hts and carry a dividend payo
ve no conversion rig
The Preference Shares ha
ng at 12%.
ii)
m ilar PrcfctfflCC Sh ares are currently iradi rrently
Si
of 15%.
10 year s and carries an interest of 16%. Cu
anucs in
The Long-tenn loan m
ill ) 18.34%
the long-<crm interest
rate for similar lo.,ns is
20%
iv) Bank overdraft rate is

v) T:vc rate is 40"/4

,
REQUIRED: hrcd average cost of capital for the company
determine the ~,:ig
(• ) Use market values 10 (JS marks)
d
dinary sh ares 60o/o, pr eference shares 20"/o an
If the optimal debt 10
equity ratio is or
(b) et values.
(S marks)
e W A CC us ing ta rg
lqng-1erm loans 20%
, determine th
b) ab ov e determ in e the best method to be
d in queslion a) and
(c) Using results obtaine (S m a rb )
used. (S m •r b )
cisions.
the shortco m ings of WACC in financing de
(d) Disctlss (JO m ar b )
capital structure deci
sions.
e fa ctors that affect
(e) Explain any thre

Pa ge l ofS
 QUESTION TWO (20 Marks)
(a) Mr Magwenzi, a Lecrurcr at a local University, has decide.d to purchase a residential
property in Harare's low-density suburb o f Mt Pleasant. The property consists o f a
double storey six-bedroom house, swimming pool and a tennis court and costs
USSI00 000.To finance the acquis ition of the property, Mr Magwenzi has just sold
his two vehicles, a Toyota tpsum and a Toyota Goin for US$7 500 each and a house in
Mbare suburb fo r US$25 000.The rema ining amount for the purchase of the property
is from a bank loan arranged with a commercial bank based in Harare. The tenn of the
loan is 5 years and the interest is 6% per annum, compounded mo nthly and payable at
the beginning of each month. The property values arc expected to rise at a rate of 9%

per year (0.75% per month).

REQUIRED:
Calculate:
The expected value of the apartment in 5 years' time (5 marks)
(i)
The loan repayment al the beg.inning of each month (5 marks)
(ii)
(b)
-
Dr Leaves wishes to retire in 30 years' time and has estimated that she will require a
monthly pension income of $12 000 per month for the 20 years after retirement. Dr

-Leaves will contribute to a retirement fund that will enable her to take out a monthly
pension of $12 000 after retirement. The retirement fund is currently earning 9% per
annum interest compounded monthly and this level of return is expected to remain
unchanged for the next 50 years. Determine the monthly contribution that Dr Leaves
is required to make to the fund over the next 30 years. (5 marks)
(c) Mufaro won $80 million lottery. She is to receive $1 million a year for the next SO
years plus an additional lump sum payment of $30 million aft.er SO years. The
discount rate is 12%. Advise her on whether to receive the lump sum of $80 million
today or receive her earnings over 50 years. (5 marks)

QUESTION THREE (20 Marks)

Explain the thinking underpinning each of the following dividend theories:
(a) Signaling hypothesis and clientelc effect
(6 marks)
(b) Bird-in-hand theory
(6 marks)
(c) Modigliani and Miller's dividend irrelevance theory
(8 marks)

Page 3 of s
 ----
r/
QUESTION FOUR (10 ~ta
r'-.,)
Wi th reference 10 11 compan
y of your choice:
(•) Discuss the var iables that det . th
erm ine the amount of wou,m canita
g ., l needed in e
..1., •

organisation
(S marks)
(b) E'<p'3in the factors thnt wilt
reduce the len gth of the v, ork
ing capital cycle.
(7 marks)
(c) Assess the factors that mu
st be considered in determini
ng the minim um stock lev
of rav. materials. els
(8 marks)

QUESTION FIVE (20 M uk

s)

A Company has a substanti

al am ount of money for inv
estments and has decided
40'/, of the money in Share to invest
A and the rest in Share B.
The following information
on the alternati ve investments is available
: 4 ()~ L ~ <:, 1
Sr.te or the eco nomy
Probability Retana (A)
Return (B)
Boom
0.2 - - 0% 20%
Rttt:SSio n o.s 20'/o 7%
\ Normal 0.3 40% 11%

REQUIRED:

(a) For each of the shares:

(i) Octcrminc the expected return
(it) Determine the risk (4 marks)
(b) For a portfolio containing the (4 marks)
two assets
(i) Calculate the expected return
(ii) Cnlculatc the risk (3 maria)

(c) Calculate the co variance and (3 marks)

the coTTClation coefficient of
the two assets. (4 marks)
(d) Discuss "'hcther the company
should invest in the two sha
res. (2 marks)

Page 4 of 5
 r
QU ES TIO N SIX (20 Ma rks )
a company arc as follows:
(•) The expected free cash flows for
Ye ar Cu bfiow
--I 400 000
-
2 450 000
3 360 000

w by 4%. Shareholders
e Cas hflo ws for yea r 4 is $34 0 000 which is expected to gro
Fre (5 marks)
is 20% . Cal cul ate the value of the company.
required rate of return in all of its
h Co rpo rati on is exp and ing rap idly and it currently needs to reta
(b) Microtcc
ect Microtech to
nin gs hen ce it doe s not pay dividends. However, investors exp
ear
three yea rs from
pay ing div ide nds wit h the first dividend of $1 .00 coming
beg in er
sho uld gro w rap idly at a rate of 50% during yea r 4 and 5. Aft
tod ay. Th e divide nd
ed
pan y sho uld gro w at a con stan t rare of 8% per yea r. If the requir
yea r 5 the com
ue of the stock today. (5 ma rks )
sto ck is 15% det erm ine the val
rerum on the

i-
has issu ed bon ds tha t hav e a 9% cou pon rate, pay abl e sem
(c) XY Z Corporation yie ld to
bon ds ma ture in 8 yea rs, hav e a face value of $10 00 and a
ann ual ly. Th e
bon d. (5 marks)
De term ine the pri ce of the
ma tur ity of 8.5%.
fifty
on is issu ing a zero-< ;ou pon bond that wil l hav e a ma tur ity of
(d) Dclago/d Co rpo rati
%.
par val ue is, $ IOO O and the cur ren t yie ld on sim ilar bon ds is 7.5
yea rs. The bon d's
ven tion .
bon d using the sem i-an nua l con
Calculate the exp ect ed pri ce of this
(5 marks)

TIO N PA PE R
END OF EXAMINATION QU ES
 Formula Sheet

PY = -
, (1
FV
-
+ r )'
p V, -
-
f
l• O
CF,
(t + r y '
· Fr annuity '" ~ ( (1 + r 'f' - I)

FV = PV
,
X (1 + r )•· PYAnnuily
I
=£(1-(l +r)-n) · PVpt"l'f#l'lllty = C
, I

PV'""'""'popm,1,,,i = -C- ; EAR = ( l + -. J"'

1
- 1: SD(R) = ✓Var(R)
r-g m

R,. = I ,p(s) x R,(s); Var(R) = I p(s) x (R - E(R))2

s
Expected Return on Asset i: E(R,) = L p(s) x R,(s), where p(s) is the
I. I

probability of the state s occurring in the economy.

E[R] = RFR + p X (MA - RFR)

E(Rr) = L. w, X E(Ri}; Cov(R,, R1 ) = El(R, - E[R,]XR1 - ElR1 DJ

CORR =
cov A, I
A,B SDA X SDI

Formula for fixed periodic payment for a loan

r(PV)
P=------
l - (1 + r )-n
Balloon Loan Payment Formula

(1+ ,)n - 1
FV = PV(l + r)n - P - - - -
r