QUESTION ONE

Diana, a 4th year BAFM student has just received a lumpsum payment of Kes 10 million after participating in sport betting She is contemplating investing Kes 5 millon in stocks of Kiserian Ltd today that pays a 6% annual dividend. The T-bill rate is 7.5% and Diana expects the market to rise in value by 10% per year. The Directors of Kiserian Ltd have approved an expansion project that is expected to increase the firms annual cash inflow by Ksh 100 million. Information on this project will be released to the market together with the announcement of the rights issue. This dividend together with the companys earnings is expected to grow by 5% annually after investing in the expansion project. In order to effectively manage it risk, Kiserian Ltd invested in 2-asset portfolio to diversify it incomes. Their weights of the assets are 45% and 55% respectively, their standard deviations are 2.1% and 3.2% and their betas are 0.9 and 1.2, respectively. Their mutual correlation coefficient is 0.5.

Required;

(a) Calculate the expected return of the portfolio (2 Marks)

(b) Calculate the portfolio beta (5 Marks)

(c0 Based on the results in (i) above, comment on the risk profile of Kiserian Management Limited, in relation to the market (3 Marks)

(d) Do you think Diana has adopted the right investment strategy considering her age and investment time horizon? Justify your answer (2 Marks)

(e) Investing in shares is riskier than investing in fixed-income investments. Having a portfolio of shares subjects investors to an emotional roller-coaster. This was a comment made by one Expert Panelist during an Investment media coverage at KTN TV. Comment on the statement above and discuss four key risks associated with shares. (3 Marks)

QUESTION TWO

(a) The following data was obtained from Belcom Microfinance- a licensed microfinance Bank during the financial year 2020-2021:

Net Income: $. 1,500,000

Number of equity shares (2020): 150,000

Number of equity shares (2021): 250,000

Dividend paid: $. 400,000

Required:

Calculate the following market value ratios for Belcom Microfinance.

(i) Earnings per share (EPS) (2 Marks)

(ii) Dividend per share (DPS) (2 Marks)

(iii) Dividend Payout ratio (2 Marks)

(iii) Retention Ratio (2 Marks)

(b) You have been tasked by the Belcom Microfinance management to calculate the value of a 3-year bond with face value of Kes. 1,200,000 and coupon rate being 12% paid annually. Calculate the value of the bond and advise whether Belcom microfinance should sell or keep the bond (7 Marks)