Question One

a$)$ The following details are available for company $Z$ at the end of the year:

Total Revenues sh$.42,000,000$

Cost of sales Sh$.12,000,000$

Other incomes sh$.4,000,000$

Operating Expenses sh$.8,000,000$

Interest on debentures is $6\%$ of the principal borrowed of sh$.34,200,000$

Operating taxes $30\%$

Fixed dividends on preference shares are $8\%$ of sh$.56,000,000$ of the principal amount raised from the stock market.

Transfers to general reserves are $8\%$ of the profit's appropriation.

Total Number of ordinary shares $20,000,000$

The cost of ordinary shares in the company is $11\%$

Required:

Based on discounted cashflows method:

i$)$ Use earnings available to ordinary shareholders to value the company's equity

$(10$ marks$)$

ii$)$ What should be the present value of this company's ordinary share by EBIT $(10$ marks$)$

Page $1$ of $3$

b$)$ EMH claims that financial analysis is pointless and investors who attempt to research security prices are wasting their time. "Throwing darts at the financial page will produce a portfolio that can be expected to do as well as any managed by professional security analysts". Yet we tend to see that financial analysts are not "driven out of market", which means that their services are valuable. Therefore, EMH must be incorrect. Comment on this statement from the efficiency market point of view. $(10$ marks$)$