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

$(20$ marks $)$

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?

$(2$ marks$)$

$($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.

$(5$ marks$)$

$($ii$)$ What would have been the average return during this period?

$(2$ marks$)$

$($c$)$ Calculate the standard deviation of returns for each stock, and the portfolio.

$(3$ marks$)$

$($d$)$ Compute the coefficients of variation for each stock and the portfolio.

$(6$ marks$)$

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

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

$(2$ marks$)$

$(20$ marks$)$

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.

$(2$O marks total $)$

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.

$(7$ marks$)$

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

$(4$ marks$)$

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

portfolio theory and the capital asset pricing model. $(6$ marks$)$

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

investment appraisal:

$($i$)$ Adjusted payback;

$(2$ marks$)$

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

$(2$ marks$)$

$[20$ marks$]$

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