Question 1 Pakasa Uganda Limited (PUL) was incorporated in Uganda in 2011 as a company limited by shares. PUL specializes in production of a wide range of products including iron sheets and steel bars among other building materials. Over the years, PUL has gained a good reputation throughout the region on account of its quality products and affordable prices offered to the customers. The annual financial statements for PUL for the year ended 30 June 2020 indicated that the company made profits after tax of Shs 12 billion and immediately declared dividends equivalent to 40% of the after tax profits subject to the shareholders' approval. The company's shareholders subsequently approved the dividends at their Annual General Meeting (AGM) held on 4 October 2020. During the AGM, one of the shareholders Mr. Kabaawo was concerned about the company's excessive concentration in a single sector (manufacture of building materials) and pointed out that however much PUL is profitable, a disruption in the real estate sector may erode away all the company's earnings. Other shareholders were in agreement with Mr. Kabaawo and immediately tasked the Board to assess the viability of any potential diversification to other sectors. The Board delegated this responsibility to the managing director who has come up with the following investment proposals for approval by the Board. Print Media Initial outlay (Shs '000') (3,500,000) Profit after tax (Shs '000') 850,000 Floor Tiles (24,000,000) 6,200,000 Cosmetics (2,500,000) 680,000 The Managing Director (MD) has further informed the Board that all the above investments will be for a period of five years except the cosmetics project whose duration is projected at four years. In his presentation, the MD informed the Board that the profits after tax for each project are expected to increase by 15% annually effective year 2 of operation for all projects although no growth will be expected in year 5 but instead a significant decline of 10% is anticipated. PUL's weighted cost of capital averages to 10% per annum and this is applied to evaluation of all PUL's projects.

The head of investments at PUL has revealed that working capital requirements are projected at 2% of each respective project's initial outlay. Working capital will increase by 5% annually and will be recovered in each project's last year of operation. The MD also informed the Board that the company has reserved Shs 27.5 billion for any potential investments and that they do not intend to raise extra funding from any other source. This is on account of the high costs of debt finance and inability to issue shares to raise equity capital because the process of listing PUL on the Stock Exchange is still work in progress. The MD further said, "I should also let the Board know that the chairman of Capital Markets Authority is my friend; so I propose that this Board approves a special package for him so that he can accelerate the process of listing our company". In his justification, the MD reiterated that the capital markets in Uganda are efficient and that listing PUL will help the company enjoy the benefits of this market efficiency. The Board was pleased by the MD's presentation and tasked him to prepare more informative report detailing the viability of these investment proposals to be presented at the forthcoming Board meeting. The MD has delegated this task to you, the head of investment.

Required: Prepare report to the MD for presentation at the forthcoming Board meeting detailing the: (a) assessment of the financial viability of the proposed investments using profitability index. (20 marks) (b) assessment of the usefulness of profitability index in investment appraisal process. (5 marks) (c) evaluation and recommendation to the Board on the most viable investment combination assuming that all investment proposals are non- divisible. (8 marks) (d) justification of using debt capital rather than equity capital to finance investments. (5 marks) (e) forms of efficient market hypothesis and their implications to PUL; (8 marks) (f) evaluation of the MD's proposal for a special package to the chairman of Capital Markets Authority.

SECTION B Question 2 Tillex Uganda Limited (TUL) is a local company that was incorporated in Uganda in year 2015. TUL deals in distribution of hardware products such as tiles, cement, and plumbing material among others. Management of TUL is considering expanding its operations to include electronics, garments and stationery sectors as a way of diversifying its risk. Management has reserved Shs 400 million for all investment proposals and it has been established that each investment would require initial capital of Shs 200 million. Management has further revealed that the returns of the proposed investments under review will depend on the state of Ugandan economy as set out below. State of Economy Depression Recovery Boom (4 marks) (Total 50 marks) Rate of return (%) Probability Electronics Garments Stationery 0.10 -5 8 -10 0.40 10 20 18 0.50 30 15 20 Management believes that the addition of the proposed investments will significantly increase the value of the company, but is not sure about which portfolio of investments to undertake and they are seeking advice. Required: (a) Evaluate the investment decision facing TUL using portfolio analysis and advise on the way forward. (15 marks) b)Explain how a company like TUL can use the mean-variance rule and correlation coefficient to select optimal portfolios. (5 marks) c)Assess the relevance of Arbitrage Pricing Theory to a company like TUL. Question 3 (a) Galop Uganda Limited (GUL) was established in year 2012 and deals in manufacture of cosmetics and detergents for sale to medium and high income earners. GUL's subsidiary in Uganda is located in the central region where there is much demand for its products. In addition to its domestic operation, GUL has two subsidiaries operating in Kenya and Tanzania which have been in operation since September 2017. GUL's subsidiaries are allowed to transact with each other provided the transactions are within the requirements of the transfer pricing policy of the group. A review of the recent annual financial statements for GUL and its subsidiaries as at 30 June 2020 revealed the following current account balances. Receivables Uganda Kenya Tanzania Uganda - KShs 25 million TShs 10 million Payables Kenya UShs 40 million - TShs 42 million Tanzania UShs 35 million KShs 20 million - The directors of GUL Group have resolved to introduce a netting system to manage intra group transactions and in doing so, the Ugandan Shilling shall be the settlement currency of the Group. As at 30 June 2020, the exchange rates quoted were as set out below. Shs 1 Shs 1 KShs 1 Required: = KShs 0.0333 = TShs 0.625 = TShs 18.77 (i) Evaluate the impact of netting to GUL Group and show the final transactions required to be settled. (ii) Explain any three factors responsible for fluctuation in foreign exchange rates in countries like Uganda. (6 marks) (iii) Discuss any two internal hedging options available to GUL apart from netting. (4 marks) (b) GUL imports its inputs for cosmetics and detergents from Dubai and for the month ended 31 October 2020, the financial records of GUL showed that the company had USD 25,000 payable to Beauty Cosmetics Limited, a Dubai-based company, for the purchases made during the period ended 31 October 2020. The payable is due in 30 days and GUL is considering hedging against the likely forex fluctuations. The current spot rate is Shs/USD = 3,600 - 3,700 whereas the futures rate is quoted at 3,700. It has been established that the standard size of a 3 months USD futures contract is USD 6,250 while the 30 days spot rate is anticipated at Shs/USD = 3,710 - 3,780 with the closing futures price projected at 3,800.

Required: Advise GUL on how it can set up a futures hedge and show the results of the hedge as at 30 November 2020. Question 4 Super Uganda Limited (SUL) is a listed company on the Kampala Stock Exchange (KSE) with a Price/Earnings (P/E) ratio of 6.0 times. SUL specializes in production of Agricultural chemicals for sale on the local market although some are exported to South Sudan. As part of SUL's expansion strategy, the directors of the company are currently considering acquiring Wonder Yield Limited (WYL) a non-listed company that specializes in distribution of improved agricultural seeds countrywide. Information about the P/E ratio of WYL is not available but the Directors of SUL estimate that it is about 50% of SUL's P/E ratio. The extracts of the recent financial statements of WYL are set out below.

Summarised Statement of Profit or Loss for year ended 30 September 2020 Revenue Profit before interest and tax Interest expense Profit before tax Taxation Profit after tax Shs '000' 85,400,000 28,500,000 (1,400,000) 27,100,000 (8,130,000) 18,970,000 Summarised Statement of Financial Position as at 30 September 2020. Shs '000' Assets Non-current Assets Net current Assets Total Net Assets Financed by: Equity and Reserves: Equity shares of Shs 1,000 Revenue reserves Other components of equity Non-current liabilities: 12.5% loan notes Total Capital 54,700,000 17,600,000 72,300,000 40,000,000 19,700,000 1,400,000 11,200,000 72,300,000 The following information is also relevant: i. SUL is a fully equity financed entity with an asset beta of 2.5. The return on treasury bills in Uganda is 8%, however available market data indicates that the return in the Agricultural sector averages to 12%. ii. It is anticipated that the acquisition of WYL will result into annual profit before tax of Shs 32 billion for five years. The annual profits are expected to increase by 10% each year effective year 2 however in year 5, a growth of 8% is expected. Both companies pay corporation tax at a rate of 30% payable in the year the tax liability arises. Required: (a) Estimate the maximum price that the shareholders of SUL are willing to pay to acquire WYL using; (i) P/E ratio method (3 marks) (ii) discounted cash flow method (7 marks)

(b) Explain any four reasons why some mergers/acquisitions fail to enhance shareholder value. (8 marks) (c) Discuss the concept of synergy and any three sources of financial synergies that can accrue to SUL as a result acquiring WYL. Question 5 Biva Electronics Limited (BEL) is a listed company that deals in importation and distribution of electronics in central Uganda. BEL's cost of capital is 20% per annum and the entity is listed with 20,000 shares of a par value of Shs 10,000 but currently trading at a premium of 12.5%. BEL is considering declaration and payment of a dividend of Shs 500 per share at the end of the current year because the company expects to generate after tax profits equivalent to Shs 25 million. The head of investments at BEL has revealed that the company also has a number of viable investment proposals that require funding worth Shs 40 million as part of the company's five year strategic plan. He is of the view that BEL should suspend paying dividends and use all earnings to undertake these viable investments so as to increase the value of the company. The company's Chief Finance Officer (CFO) however does not agree with his colleague as he holds a view that the value of any company is not affected by distribution of dividends.

Required:

(a) Using Modigliani and Miller (M&M) theory to dividend policy, discuss the validity of the CFO's view on distribution of dividends. (12 marks) (b) Justify the validity of the traditional school of thought to dividend policy. (8 marks) (c) Explain the concept of scrip dividends and show why companies may opt for scrip dividends. (5 marks)