Question one

Shinde Plc, a company incorporated in Zambia has investment opportunities in Muchinga and Lusaka provinces respectively. The company management is planning to invest K10.8 million in one of the provinces as the projects are mutually exclusive. The project is expected to produce/sale 260,000 units per year in Muchinga province and production/sales in Lusaka province will be more by 10,000 units per year. The selling price per unit in the first year will be K20 in Lusaka and K22 in Muchinga.

The following additional information is provided by the management accountant:

Variable cost per unit in the first year will be K9 in Lusaka and K8 in Muchinga. Fixed overhead is K1.5 million per year for both provinces. Included in the fixed overhead is depreciation of K15, 000 per year. The selling price per unit and variable cost per unit are expected to increase by 7% and 6% per year in subsequent years in both provinces. Corporation tax is 30% and the scrap value for both projects is K3 million after tax. The projects are expected to run for 5 years.

The real interest rate and inflation rate in the market are 9% and 5% respectively.

Required:

1. Calculate the projects Net present value (NPV) for Lusaka (8 marks)
2. Calculate the projects internal rate of return for Lusaka Project (8 marks)
3. Mwetech has a beta of 1.6 and operates in market with a market return of 11%. The government recently has issued treasury bills with a return of 5% in this market.

The company has current shares of 20,000 and current distributable earnings of K60, 000. Dividend per share is expected to grow at a constant rate of 3%. Calculate the price per share assuming that all distributable earnings are paid as dividends. (4 marks)