A. Mukuba group has a K12 million face value bond issue outstanding. The issue carries a coupon rate of 10% with interest paid quarterly. The issue matures in three (3) years. What is the values of the bond issue if it is priced to provide a yield to maturity of 12%? (10 Marks) B. Nampundwe Mining Company has just paid a dividend of K1.60 per share on its common stock. The company expects to increase the dividend at a 20 percent annual rate for the first four (4) years and at a 13 percent rate for the next four (4) years, and then grow the dividend at a 7 percent rate thereafter. This growth pattern is in keeping with the expected life cycle of earnings. You require a 16 percent return to invest in this stock. Required Calculate the value you should place on a share of this stock. (15 Marks) QUESTION TWO It is now January 1, 2018. Last year Kenworth Enterprises experienced major operational problems which affected the company's financial condition, forcing management to temporarily suspend dividend payments. It is expected that the company will not pay a dividend in 2018 and 2019 but will declare a dividend of K50 per share in 2020. Dividend growth is expected to be 3 percent in 2021 and 2022 and thereafter growth is expected to indefinitely be the same as for the economy, 6 percent. The required rate of return is 10 percent. Required A. Calculate the expected dividends for 2018 through to 2022 B. What is the value of the stock today? (10 Marks) (15 Marks) QUESTION THREE Sebenzani plc is a quoted company. Its directors are reviewing the company's long term investment financing strategy. The company has been criticised for being financed largely by equity. It has no significant long term borrowings. The board has asked for some calculations to enable them to decide whether the company should consider borrowing in the future. The Page 1 of 2 next phase of expansion will require the company to raise K200m and will involve a general expansion of the existing lines of business. The following information has been obtained: Current risk free rate 4% Equity risk premium 5% Current corporation tax rate 30% Equity capital K1,000m Sebenzani plc's Beta 1.4 Probable gross interest rate on debt 7% Required A. Calculate Sebenzani plc's expected weighted average cost of capital (WACC). (5 Marks) B. Calculate Sebenzani plc's expected WACC after the new finance has been raised assuming that the finance is raised by borrowing. (10 Marks) C. Explain the concept of CAPM in relation to cost of capital and risk in investment. (5 Marks) D. It has been suggested that company directors are often motivated by a desire to act in their own best interests rather than those of the shareholders. Explain why directors might be reluctant to use the capital asset pricing model (CAPM) as a decision making criterion for financial planning. (5 Marks) END OF ASSIGNMENT