Business Article : World Economic Forum

Even years ago, the Harvard Business Review pointed out that Africa is also home to many of the worlds biggest opportunities. And yet, despite its tremendous business potential, Africa has not risen to the top of Western business leaders agendas.

In fact, between 2014 and 2016, US exports to Africa fell by almost half, from $38 billion to $22 billion. And while the United Kingdoms investments on the continent more than doubled between 2005 and 2014, reaching 42.5 billion ($57.6 billion), only 2.5% of its total exports are to Africa.

Western countries are quickly losing ground to China, which increased its exports to Africa more than sevenfold to $103 billion from 2005 to 2015. If Western businesses hope to keep up, they will need to tap into the African countries and sectors with the highest potential for growth.

By 2030, more than half of Africas population will reside in seven countries: Nigeria, Ethiopia, the Democratic Republic of Congo, Egypt, Tanzania, Kenya, and South Africa. But, more important, 43% of Africans will belong to the middle or upper classes, up from 39.6% in 2013, implying considerably higher demand for goods and services. By 2030, household consumption is expected to reach $2.5 trillion, up from $1.1 trillion in 2015.

Nearly half of that $2.5 trillion will be spent in three countries: Nigeria (20%), Egypt (17%), and South Africa (11%). But there will also be lucrative opportunities in Algeria, Angola, Ethiopia, Ghana, Kenya, Morocco, Sudan, and Tunisia. Any one of these countries would be a good bet for companies seeking to enter new markets.

By 2030, the sectors generating the most value in Africa will be food and beverages ($740 billion), education and transportation ($397 billion), and housing ($390 billion). But there will also be strong growth in consumer goods ($370 billion), hospitality and recreation ($260 billion), health care ($175 billion), financial services ($85 billion), and telecommunications ($65 billion).

Of course, much of this growth will depend on the African Union properly implementing its new Continental Free Trade Area, which would create a single market for goods and services, offering corporations many points of entry. Moreover, the CFTA will increase the need for connectivity, so there will be new opportunities to invest in infrastructure and sectors ranging from transportation and energy to information and communications technology (ICT) and water supplies. For its part, the African Development Bank can help investors find promising projects through its Program for Infrastructure Development in Africa.

Another major growth area between now and 2030 will be in African business-to-business spending, which will reach $4.2 trillion, up from $1.6 trillion in 2015. Here, the largest sectors will be agriculture and agricultural processing ($915 billion), manufacturing ($666 billion), and construction, utilities, and transportation ($784 billion), followed by wholesale and retail ($665 billion), resources ($357 billion), banking and insurance ($249 billion), and telecommunications and ICT ($79.5 billion).

The expected growth in agriculture and agricultural processing reflects the fact that food and beverages will constitute the largest share of total household spending. Moreover, 60% of the worlds unused arable land is in Africa, which still contributes a meager share of worldwide agricultural exports. That means there is a lot of room for growth. And, because severe hunger still affects many African countries, investors can even contribute to the public good by investing in fertilizers, machinery, water and irrigation systems, and other areas of the agriculture sector.

As of 2012, the African countries with the highest agricultural value-added in terms of annual growth included Burkina Faso, Ethiopia, Nigeria, Mali, Mozambique, Rwanda, and Tanzania. In addition, Angola, Morocco, and South Africa now all have sizable markets, and have committed to expanding their agricultural sectors.

Part (1)

Required

After reading the above article by the world economic forum on aspects of investments in Africa and expected returns, the CEO of your company based on your expertise has asked you a few questions for your guidance

1. Pepsi Africa maintains a debt-equity ratio of 0.40 and follows a residual dividend policy. The company has after-tax earnings of $2,000 for the year and needs $1,600 for new investments. What is the total amount Pepsi Africa will pay out in dividends this year and what is your view on your calculation? [6 Marks]
2. Zambia choice Investments has recently purchased a stock that is expected to earn 15% in a booming economy, 10% in a normal economy and lose 7% in a recessionary economy. There is a 17% probability of a boom, a 72% chance of a normal economy, and an 11% chance of a recession. What is your expected rate of return on this stock? [8 Marks]
3. Shares in SAMSUNG Africa are currently selling for $5.5625. At the beginning of the year you bought them for $5.25 and during the year a dividend of 23.25 cents per share was paid. What is the return? [6 Marks]