Project 2 : Bills Enterprise

The second proposal concerns Bills Enterprise Ltd, whose main business activity is

construction of houses. A new tender has been awarded to build 100 teachers houses in

Central province. The accounting team identified the following projected cash flows:

Investment outlays are K 6 million immediately and K1 million as working capital at the

end of the first year increasing 30% up to year four. In year five only K200, 000 is

required the rest is to be returned.

After - tax operating cash inflows are K0.5 million at the end of the first year and K0.7

million at the end of each of the second, third, fourth, and fifth years from block making

to help with the working capital of the project. A major payment of K10 million will be

received at the end of the five year period as the houses will be handed over to Ministry

of Education.

Additional Information:

Kays Home Depot is a listed company on the Lusaka Stock Exchange and its financing

structure is as follows:

Ordinary shares of K1 each 250

Retained profits 150

9% irredeemable K1 preference shares 50

7% loan stock 2019 250

Total 700

The ordinary shares were quoted at K2.50 ex div on 31st December 2018.The beta of

Kays Home s equity shares stands at 0.8,the annual yield on treasury bills is at 7%.The

financial markets despite the effect of Covid -19 expects an average annual return of 15%

on the market index.

The market price per preference shares was K0.90 ex div on 31st December 2018.

Loan stock interest is paid annually in arrears and is allowable for tax at a tax rate of

30%.The loan stock was priced at K100.50 per K100 on 31st December2018.Loan stock

is redeemable on 31st December 2021.

The required rate of return on the construction of new houses project is being

determined. Taxation is charged at 30% and paid in arrears.

Tasks Required:

a. Calculate the required rate of return using Capital asset pricing model (CAPM) for

Kays Home as at 31st December 2019.Breifly explain the implications of a Beta of

less than 1 in relation to Kays Home. (5 marks)

b. Calculate the weighted average cost of capital of Kays Home Depot as at 31st

December 2019 ( 10 marks)

c. Calculate the Net present value of this project using the correct cost of capital found

in either a or b. Explain why that particular cost of capital has been chosen

considering the project risks. (15 marks)

Total marks (30 marks)

d. Extra marks will be awarded for neat work, well referenced using scholarly articles,

coherence and well written assignments. (5 marks)