QUESTION FOUR: Suppose you have just been appointed the Finance Director of your company and you are considering borrowing options for K5 Million for 1 month in order to raise short-term funds. The following were the options to you: i. Draw down a line of credit at 10.0 % with 6.0% commitment fee on full amount. ii. Bankers Acceptance at 16.0%, an all-inclusive rate and iii. Commercial Paper at 10.0% with a dealers commission of 4.0% and a back-up line cost of 6.0%. Determine which option would result in the lowest borrowing cost B)

You are offered an investment that will pay you K980 in one year, K1,250 in year 2, K2,650 in year 3 and K3,800 in year 4. You can alternatively earn 15% on treasury Bills investment. Required: i. Calculate the Present Value (PV) of this stream of investment income. 5 Marks ii. What is the difference between primary and secondary markets? 10 Marks b) Find the Stocks Intrinsic value i.e. value of the stock using the Constant Growth Stock Model assuming that ABC plc has just paid a dividend of K10.5 (Do=K10.5), required rate of return (rs=20%), and the investors expectation of dividend is at a growth rate of 15% for the future (g )

C)

Long-Term financing consists of either Debt or Equity Instruments. Required: i. In what situations does a company require long-term financing?- 5 Marks ii. Identify and describe in detail the type and characteristics of equity and debt instruments. 15 Marks

D)

i. Explain in detail what is meant by the weighted average Cost of Capital (WACC) 5 Marks ii. Suppose Your Company where you work as Finance Director is financed by both long-term debt (bonds) and equity. In the recent Board Meeting, it was agreed that you needed to raise extra funds for capital Expenditure (K8 Million). Since your company is listed on the Lusaka Stock Exchange, you sold 600 worth of bonds at K5, 000 each at 10% coupon rate. The company further issued stocks totalling 25,000 at K200 each with an expected return of 10%. The Tax rate is at 25%. Calculate the Weighted Average Cost of Capital (WACC) for your company 15 Marks