QUESTION THREE The world economic forum requires advice on aspects of investments in Africa and expected retums. The following information is available: Pepsi Africa Plc Pepsi Africa maintains a debt to equity ratio of 0.40 and follows a residual dividend policy. The company has after-tax earnings of K2,000,000 for the year ended 30 June 2020 and needs K1,600,000 for new investments Zambia Choice Investments Ple Zambia choice Investments has recently purchased a stock that is expected to earn 15% in a booming economy, 10% in a normal economy and lose 7% in a recessionary economy. There is a 17% probability of a boom, a 72% chance of a normal economy, and an 11% chance of a recession SAMSUNG Africa Plc Shares in SAMSUNG Africa Plc are currently selling for K5 56 at 30 June 2020. At the beginning of the year, Charles Tembo bought 2,000 shares in SAMSUNG Africa Plc at a K1.50 Share price The required amount of K125 million may be raised by way of issuing new shares at a price of K125 per share or by way of issuing a 12% bond As a result of making the proposed investment, the company's sales will increase by 10% per annum from the year ending 30 June while the net profit margin and dividend pay out ratio will be at the same level as in the previous financial year ended 30 June 2020 Companies operating in the same sector as RAMSEY Pic have an average ratio of debt to equity (Book value of debt Book value of equity) of 50%. Required: (a) Calculate the maximum amount Pepsi Africa Plc should pay out in dividends for the year ended 30 June 2020 and comment on your result. [5 Marks] (b) Calculate the expected return on the stock purchased by Zambia Choice Investments Plc [6 Marks] (c) Calculate Charles Tembo's return on his shares in SAMSUNG Africa Plc over the one year period [4 Marks] (d) Advise management of RAMSEY Pic of the factors that should be taken into account when choosing between equity and a bond issue when raising the new finance. [10 Marks] QUESTION THREE The world economic forum requires advice on aspects of investments in Africa and expected retums. The following information is available: Pepsi Africa Plc Pepsi Africa maintains a debt to equity ratio of 0.40 and follows a residual dividend policy. The company has after-tax earnings of K2,000,000 for the year ended 30 June 2020 and needs K1,600,000 for new investments Zambia Choice Investments Ple Zambia choice Investments has recently purchased a stock that is expected to earn 15% in a booming economy, 10% in a normal economy and lose 7% in a recessionary economy. There is a 17% probability of a boom, a 72% chance of a normal economy, and an 11% chance of a recession SAMSUNG Africa Plc Shares in SAMSUNG Africa Plc are currently selling for K5 56 at 30 June 2020. At the beginning of the year, Charles Tembo bought 2,000 shares in SAMSUNG Africa Plc at a K1.50 Share price The required amount of K125 million may be raised by way of issuing new shares at a price of K125 per share or by way of issuing a 12% bond As a result of making the proposed investment, the company's sales will increase by 10% per annum from the year ending 30 June while the net profit margin and dividend pay out ratio will be at the same level as in the previous financial year ended 30 June 2020 Companies operating in the same sector as RAMSEY Pic have an average ratio of debt to equity (Book value of debt Book value of equity) of 50%. Required: (a) Calculate the maximum amount Pepsi Africa Plc should pay out in dividends for the year ended 30 June 2020 and comment on your result. [5 Marks] (b) Calculate the expected return on the stock purchased by Zambia Choice Investments Plc [6 Marks] (c) Calculate Charles Tembo's return on his shares in SAMSUNG Africa Plc over the one year period [4 Marks] (d) Advise management of RAMSEY Pic of the factors that should be taken into account when choosing between equity and a bond issue when raising the new finance. [10 Marks]