Question Two (A) You have been promoted to head of Treasury and Investment Management at Ecobank and have been handed information on a number of issues for which immediate answers are required. For each excerpt from the issues presented below answer the associated question(s): (i) Ecobank holds 500 million T-Bill but is in short of cash. It needs cash to meet the requirement of a customer who has come to withdraw 400 million. You have been asked to approach Barclays Bank to sell the T-Bill for 495 million with agreement to repurchase within 4 working days. (a) How much in cedis does Ecobank lose in this transaction (2 marks) (b) What is the Repo Rate on this transaction? (2 marks) (ii) You have just been offered a commercial paper with a face value of 45,000,000 which bears a discount of 36% and has 182 days to mature. (a) How much will you be prepared to pay for this paper? (2 marks) (b) What is the cedi discount on the paper? (2 marks) (iii) Ecobank plans to issue a 2-year bond with a face value of 500,000,000 bearing 20% coupon rate. The market interest rate is 25%. The coupons are paid every six months. You are to calculate the price of this bond. (2 marks) (iv) An investor buys a 9% coupon bond at a price of 8,500,000 on 1st January 2016. At 31st December 2016, he needed money to spend with his family in the new year and thus sold the bond for 9,125,000. During the 12 months of holding the bond, he received a coupon amounting to 765,000. (a) Calculate the one-year holding period return on the bond for this investor (2 marks) (b) What is the current yield on the bond? (2 marks) Question Two (B) Abacus Ltd is an investment fund that specializes in fixed income securities. At the end of 2010 the funds bond portfolio has the following information Bond Yield to Maturity Price Duration Convexity A 12% 1045 2.35 16.46 B 14% 2265 4.26 22.80 C 8% 1430 3.45 11.96 D 10% 1100 4.20 15.56 Examiner: Ebenezer Bugri Anarfo (PhD) Page 3 Assume that the yield to maturity on each bond increases by 4%, calculate (i) The percentage by which the price of each bond will decrease (2 marks) (ii) The amount in cedis by which the price of each bond will decrease (2 marks) (iii) The percentage and the cedi decrease in the total value of the portfolio. (2 mark) Question Three (A) The results of Tender 1065 herd on 2nd tvfay2008 for Government of Ghana Securities show the rates for 91 Day and 182 Day Treasury Bills as follows: TREASURY BILLS AND NOTES Securities 91 Day Bill 182 Day Bill l Year Note 2 Year Fixed Rate Note Range of Bid Rates (% P.A) 10.79 - 13.00 11.00 - 12.70 12.00 - 14.00 13.00 - 14.00 Bid Rates Allotted in Full (% P.A) Discount Rates 10.79 - 12.80 11.00 - 12.70 Interest Rates ?-? ?-? 12.00 - 14.00 13.00 - 14.00 3 Year Fixed Rate Note 14.00 - 16.50 14.00 - 16.50 Source: The Ghanaian Times, Monday May 5, 2008 Using the Discount Rates provided for the 91 Day Bill and 182 Day Bill, calculate their Interest Equivalent Rates indicated in the table with Question Marks (?). [8 Marks] NOTE: DO NOT DRAW THE TABLE Question Three (B) A five-year bond is issued with a face value of GHC3000.The bond pays coupon semiannually at 10%. The yield to maturity is 8%. Another five-year bond with the same face value is provides a coupon of 15% but the yield to maturity is 12.5%. You are required to calculate a) the price of each bond (3marks) b) the duration of each bond (3 marks) c) the convexity of each bond (3 marks) d) If interest rate increases by 500 basis points, calculate and identify which bond will experience a higher change in price in terms of percentage and absolute amount. (3 marks) Question Four (A) a) You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow. On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firms value using several possible assumptions about the growth rate of cash flows. (i) What is the firms value if cash flows are expected to grow at an annual rate of 0% from now to infinity? (2 marks) (ii) What is the firms value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity? (2 marks) (iii) What is the firms value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity? Examiner: Ebenezer Bugri Anarfo (PhD) Page 4 (2 marks) b) Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firms common stock value. The firms CFO has gathered data for performing the valuation using the free cash flow valuation model. The firms weighted average cost of capital is 11%, and it has $1,500,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 years, 2013 through 2017, are given below. Beyond 2017 to infinity, the firm expects its free cash flow to grow by 3% annually. Year Free Cash Flow (FCF) 2013 $200,000 2014 250,000 2015 310,000 2016 350,000 2017 390,000 (i) Estimate the value of Nabor Industries entire company by using the free cash flow valuation model. (2 marks) (ii) Use your finding in part i, along with the data provided above, to find Nabor Industries common stock value. (2 marks) (iii) If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share? (2 marks) Question Four (B) African Capital Investment Company (ACIC) has decided to open a branch in Ghana as a first step in diversifying its equity portfolios to incorporate emerging market assets. They are therefore assessing the performance of three funds that have been suggested to them by their local consultant. The three funds are: (a) Alpha Fund which caters to the investment needs of students and lecturers (b) Gamma Fund which is meant for nurses and medical doctors (c) GSE Fund which is set up to mimic the GSE-All Share Index Their decision to locate in Ghana is dependent on their perceived performance of the various funds already operating in the country. They have gathered five years of return data and other basic statistics on the funds; which are presented below: Year Alpha Fund Return (%) Gamma Fund Return (%) GSE Fund for All Shares Return (%) 1 18.5 24.3 18.3 2 10.3 9.4 4.7 3 -9.2 18.8 16.2 4 20.1 -12.6 31.4 5 14.3 20.4 -3.3 Beta Coefficient Mean Return Standard Deviation 0.34 10.80 10.57 0.55 12.06 13.27 1.00 13.46 11.92 The five-year average return on the Government of Ghana One Year Treasury Note is 5.0%. Based on the information above they have asked you to present to them your assessment of the performance of the above funds using the following performance measurement indexes: (a) Sharpe's Performance Index [4 Marks] (b) Treynor's Performance Index [2 Marks] (c) Jensen's Performance Index [2 Marks] In each case indicate which fund performed best