SECTION B Suppose project A has an expected return of 27% and a standard deviation of 16% while project B has expected return of 21% and a standard deviation of 12%. Suppose Mr. Just invested 2/3 of his money in project A and the remaining in project B and given the projects' correlation coefficient to be 0.4.(20 marks). I. What are their expected return and standard deviations? (4 marks) II. How would your answer change if the correlation coefficient was 0 or 0.5? (4 marks) III. Is Mr. Just's portfolio better or worse off than one invested entirely in project A, or is it not possible to say? (4 marks) IV. What does portfolio risk reduction mean? (4 marks) Under what condition is portfolio risk reduction not possible? (4 marks) V. SECTION C 1. (a) Rosie's has 1,800 shares outstanding at a market price per share of GHS 23.50. Sandy's has 2,500 shares outstanding at a market price of GHS 21 a share. Neither firm has any debt. Sandy's is acquiring Rosie's. The incremental value of the acquisition is GHS 1,200. What is the value of Rosie's to Sandy's? (5 marks) 2. (a) Explain the meaning of the dividend clientele effect and why it is important. (5 marks) (b) Steve purchased 300 shares of Alpha Beta stock on May 9. On May 15, he purchased another 200 shares and then on May 22 he purchased a final 400 shares of Alpha Beta stock. The company declared a dividend of GHS 1.60 a share on April 30 to holders of record on Friday, May 23. The dividend is payable on June 2. How much dividend income will Steve receive on June 2 from Alpha Beta? (5 marks) (c) The Floral Shoppe and Maggie's Flowers are all-equity firms. The Floral Shoppe has 2,500 shares outstanding at a market price of GHS 16.50 a share. Maggie's Flowers has 5,000 shares outstanding at a price of GHS 17 a share. Maggie's Flowers is acquiring The Floral Shoppe for GHS 42,900 in cash. The incremental value of the acquisition is GHS 1,200. What is the net present value of acquiring The Floral Shoppe to Maggie's Flowers? (5 marks) SECTION D 1. Tobinco Pharmacy is considering a new malaria drug that has a total life span of 20 years, seven (7) of which will be used in its pre-trial and testing and the remaining thirteen (13) will be the revenue generating years. Phase I will take two years and cost $ 35 million. Phase II will take another two years and cost $40.4 million. Phase III will take three years and cost $500 million. All costs for the individual phases will be made at the beginning of each phase. The product will then be launched at the beginning of the 8th year for another $405 million. Cash inflows of $843 million per year are expected Since they do not have the expertise internally, you have been consulted to help management in arriving at an appropriate decision. Your terms of reference are to: Determine the viability of this project using the following techniques (the firm has a cost of capital of 20%): 1 Net Present Value, (5 marks) ii) Profitability Index, (2.5 marks) ii) Discounted Payback (2.5 marks) iv) Payback period(3 marks) 2. What is the intrinsic value of a bond that offers a 14% coupon in a market with an interest rate of 12%? The bond matures in 5years and has a face value of $1000. Should this bond be traded at a discount, premium or at par? (4 marks) 3. BSIC has annual coupon bond on the market with a $1,000 face value. The bond currently sells for $903.7351 and has a 9 percent yield to maturity. What is the bond's annual coupon rate? (4 marks) 4. You intend to purchase a 5-year, $1,000 face value bond that pays interest of $140 every year. If the bond is currently selling for $1071, what is your yield to maturity? (4 marks)
