QUESTION ONE

Edwin, a new retiree has just received a lumpsum payment from his Pension Company. He is contemplating investing Kes 10 million in stocks of Hosea Ltd today that pays a 5% annual dividend. The stock has a beta compared to the market of 1.2. The T-bill rate is 7.5% and Edwin expects the market to rise in value by 9% per year. The Directors of Hosea Ltd have approved an expansion project that is expected to increase the firm's annual cash inflow by Ksh 94.5 Million. Information on this project will be released to the market together with the announcement of the rights issue. This dividend together with the company's earnings is expected to grow by 5% annually after investing in the expansion project.

Required:

(a)Calculate the expected return of the portfolio

(b)Before executing his action, Edwin decided to consult her daughter Mueni, an Investment Analysis student who advised him to conduct a fundamental analysis of the Hosea Ltd before making a final decision.Explain what fundamental analysis involves and highlight some of the variables that he needs to look at as part of fundamental analysis.

(c)Kilonzo, Edwin's first-born son does not seem to agree with Mueni's suggestion. He instead advised Edwin to conduct a Technical Analysis of Hosea Company before making the final investment decision. In your opinion who between Mueni and Kilonzo is giving the correct advice and why?

(d)Comment on the risk profile of the above stock compared to the market

(e)Assuming that the Kenyan stock market is semi-strong efficient, assess the impact of Hosea Limited expansion plans to the price of the shares of Hosea Limited?

(f)Do you think Edwin has adopted the right investment strategy considering his age and investment time horizon? Justify your answer

(g)The Group Financial Controller of Hosea Ltd is aware of some sensitive information which may potentially have an impact on the performance of Hosea Ltd shares in the securities exchange and wanted to profit on the same. Comment on the implication of this action on;

(i)Semi-strong efficient market

(ii)Strong efficient market