Trial Test 4: Only the figures are needed. Leave answers on rates to percentages and correct all your answers to 2 decimal places.

1. Assume that a 7% coupon bond with a 30 year maturity has a par value of GHc1,000. Assuming coupon payments are made twice a year; Determine the value of the bond to an investor whose required rate of return is 12 percent. *

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2. Suppose a bond with a 8% annual coupon rate, has a face value of $1,000, 20 years to maturity and is selling for GHc 845. What is its yield to maturity when the face value of the bond is GHc1,000? *

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3. Collins & sons are planning to purchase the stock of a firm. Information reaching them is that the firm is expected to increase dividends by 15% in one year and by 20% in two years. After that, dividends will increase at a rate of 6% per year indefinitely. If the last dividend was GHc10 and the required return is 15%, at what price are Collins & sons expected to purchase this stock?

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4. You observe a stock price of GH30.25. You expect a dividend growth rate of 4%, and the most recent dividend was GH2.50. What is the required return?

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5. Current forecasts are for Amenuveve Company to pay dividends of GH2, GH2.24, and GH2.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of GH84.48. What is the price of the stock given a 12% expected return?

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6. Guinness Ghana is about to undertake a project which requires initial investment of GH300,000. The expected cash inflows from year 1 to year 5 are GH80,000, GH100,000, GH110,000, GH80,500 and GH100,500 respectively. The required rate of return is 12%. Find the NPV of the project *

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7. You invested 350,000 and expect to earn 120,000 at the end of year 2, 220,000 in year 3 and 150,000 in year 4. Calculate the IRR of the project. Required rate of return is 15%. *

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8. A project requires GH100,000 investment and the expected cash flows from the project are as follows, Year 1 30,000, Year 2 35,000, Year 3 45,000, Year 4 65,000 and Year 5 70,000. What is the discounted payback in number of years? The required rate is 10% *

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Assume you own two stocks; MTN Shares and Ecobank Shares. You have invested GHC 20,000 in MTN and GHC 15,000 in Ecobank. The return for MTN is 20% whilst that of Ecobank is 14%. The standard deviation for MTN is 12% whilst the standard deviation of asset B is 7%. The correlation between MTN and Ecobank is given as 0.30

Use this information to answer Question 9 to Question 11

9. What is your portfolio return? *

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10. What is your portfolio standard deviation as proposed by Markowitz? *

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11. What is the covariance between the two assets? Write the full figures *

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12. Assume that the current risk-free rate is 14%, and that we expect the return on the GSE Composite Index to be 26%. What is expected to be the systematic risk of MTN shares when the expected return is 30%? *

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13. MTN has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of GHc20 a share. There are 40,000 shares of preferred stock outstanding at a market price of GHc34 a share. The bond issue has a total face value of GHc500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for MTN Shares?

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14. ALuworks has a market value equal to its book value. Currently, the firm has excess cash of GHc45,000, other assets of GHc10,800, and equity valued at GHc55,800. The firm has 20,000 shares of stock outstanding and net income of GHc150,000. What will be the number of shares repurchased if Aluworks uses 25 percent of its excess cash to complete a stock repurchase? *

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Tigo Ltd is contemplating the acquisition of Airtel Ltd. The present values of the two companies as separate entities are GH30million and GH10million respectively. Tigo estimates that by combining the two companies, it will reduce marketing and administration costs by 700,000 per year in perpetuity. Tigo can either pay 15million cash for AIrtel or offer Airtel shareholders a 50% holding in Tigo. The opportunity cost of capital is 10%.

Use this question to answer Question 15 to Question 18

15. What is the gain from the merger *

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16. What is the cost of the cash offer? *

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17. What is the cost of the stock alternative? *

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18. What is the NPV of the acquisition under the cash offer? *

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19. What is its NPV under the stock offer? *

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20. MTN share price as at 1st October, 2019 was GHc0.73 and the outstanding shares were 24 million. Dividend of GHc0.05 per share was declared on 20th October, 2019 and the record date for the dividend payment was 5th November 2019. What is likely to be the total equity value of MTN as at 4th November, 2019. *

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