Question One

Review the $2022$ Capital Markets Master Plan $($CMMP$)$ for Zambia, and discuss the strategic initiatives that are planned for implementation in the country$$s primary and secondary markets in ANY Four $(4)$ of the following development areas:

$($I$)$

Enhancing the government bond government

$($II$)$

Enhancing other traditional security markets

$($III$)$

Development of new and innovative products$/$markets

$($IV$)$

Enhancing capacity building across the capital markets

$($V$)$

Enhancing the capital market regulatory environment

Question Two

Given the following Lusaka Stock Exchange returns over the last five years:

Year ZANACO Stock Return $($RA$)\%$ CEEC Stock Return $($RB$)\%$ LUSE Stock Index Return $($RM$)\%$

$2019141312$

$202019710$

$2021-16-5\mathrm{.}00-12\mathrm{.}00$

$20223\mathrm{.}001\mathrm{.}001\mathrm{.}00$

$202320\mathrm{.}0011\mathrm{.}0015\mathrm{.}00$

$($a$)$

What is the average rate of return for each stock during the five year period?

$($b$)$

Assuming that a fund manager held a portfolio comprising of $40\%$ of ZANACO stock and $60\%$ of CEEC stock.

$($i$)$

What would have been the realized rate of return on the portfolio in each year.

$($ii$)$

What would have been the average return during this period?

$($c$)$

Calculate the standard deviation of returns for each stock, and the portfolio.

$($d$)$

Compute the coefficients of variation for each stock and the portfolio.

$($e$)$ Assuming $,$ the fund manager is risk averse, advise which investment the fund

manager would likely prefer, ZANACO, CEEC stock or the portfolio?

Question Three

Eagle Milling Limited is entirely financed by equity with a cost of capital of $18\mathrm{.}5\%.$

The risk $-$free rate is $8\%,$ and the expected return on an average market portfolio is

$15\%.$

The company is considering the following capital investment projects:

Project Initial Investment

$($Now$)$

K$000$

Expected Receipt

$($In One Year$)$

K$000$

Beta

Factor

A $10,00010,9500\mathrm{.}3$

B $10,00011,3000\mathrm{.}5$

C $15,00017,8001\mathrm{.}0$

D $20,00023,8501\mathrm{.}5$

E $20,00024,0002\mathrm{.}0$

$($i$)$ Calculate Eagle Milling Limited$$s beta factor.

$($ii$)$ Using CAPM, estimate the required return for each project.

$($iii$)$ Calculate the expected rate of return of each project.

$($iv$)$ Determine which projects would be accepted or rejected if they were

discounted at the firm$$s cost of capital, and indicate the projects where an

incorrect decision would be made.

Question Four

The equity beta of ZAMEFA is $0\mathrm{.}9$ and the company has issued $10$ million ordinary

shares. The market value of each ordinary share is K$7\mathrm{.}50.$ The company is also financed

by $7\%$ bonds with a nominal value of K$100$ per bond, which will be redeemed in seven

years$$ time at nominal value. The bonds have a total nominal value of K$14$ million.

Interest on the bonds has just been paid and the current market value of each bond is

K$107\mathrm{.}14.$

ZAMEFA plans to invest in a project which is different to its existing business operations

and has identified a company in the same business area as the project, MEMACO. The

equity beta of MEMACO is $1\mathrm{.}2$ and the company has an equity market value of K$54$

million. The market value of the debt of MEMACO is K$12$ million.

The risk$-$free rate of return is $4\%$ per year and the average return on the stock market is

$11\%$ per year. Both companies pay corporation tax at a rate of $20\%$ per year.

Required:

$($a$)$ Calculate the current weighted average cost of capital of ZAMEFA.

$($b$)$ Calculate a cost of equity which could be used in appraising the new project.

$($a$)$ Explain the difference between systematic and unsystematic risk in relation to

portfolio theory and the capital asset pricing model.

$($b$)$ Briefly discuss the following methods of adjusting for risk and uncertainty in

investment appraisal:

$($i$)$ Adjusted payback;

$($ii$)$ Risk$-$adjusted discount rates.

Question Five

ZCCM $$ IH is reviewing investment proposals submitted by its departmental heads. Its

investment funds are limited to K$8$ million in $2024.$ Details of three possible

investments, none of which can be delayed, are given below:

Project $1$

An investment of K$3$ million in work stations. Each work station would be for an

individual employee $,$ and would lead to savings in labour costs from increased

efficiency and from reduced absenteeism$.$ Savings in labour costs in money terms are

expected to be as follows:

Year $12345$

Cash Flows $($K$000)8509009501,000950$

Project $2$

An investment of K$4\mathrm{.}5$ million in cloud computing hardware that is expected to reduce

administration costs by K$1,400,800$ per annum in money terms for the next five years.

Project $3$

An investment of K$4,000,000$ in new biometric access control machines. Net cash

savings of K$1,200,000$ per annum are expected in current price terms and these are

expected to increase by $3\mathrm{.}6\%$ per annum due to inflation in the five year life of the

machines.

ZCCM $$ IH$,$ has a money cost of capital of $12\%$ and taxation should be ignored.

Required:

$($a$)$ Determine the best way for ZCCM $$ IH to invest the available funds and calculate the

resultant NPV:

$($i$)$ On the assumption that each of the thr