DR G MUPONDA

UNIVERSITY OF ZIMBABWE
DEPARTMENT OF BUSINESS STUDIES
CORPORATE FINANCE: BS204
1ST SEMESTER FINAL EXAMINATION

DATE: NOVEMBER/DECEMBER, 2013

TIME: 3 HOURS

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INSTRUCTIONS TO CANDIDATES
ANSWER ALL QUESTIONS
QUESTION ONE [20 MARKS]
1(a)You deposit $4 000 into an account that pays simple interest at 1.21% per year. How much
do you receive when you withdraw the money after 3 years, 7 months and 19 days?[2 MARKS]
1(b)You contribute $40 at the beginning of each month into a mutual fund. The fund is then
invested to earn a return of 11.21% per year, compounded monthly. How much do you receive
after contributing for 7 years? [3 MARKS]
1(c) Calculate the effective annual rate for 103% per year, compounded daily. [2 MARKS]
1(d) What is the present value of a weekly annuity-due of $50 for 8 years at an interest rate of
18% per year compounded weekly?[3 MARKS]
1(e) You have $4 000 to invest in a security that pays annual interest monthly. You want this
amount to accumulate to $12 000 in five years' time. What interest rate should you consider?[2
MARKS]

QUESTION TWO [20 MARKS]

2(a) On the 11th of May, 2013 you deposit $7 000 in CBZ at 8.14% pa compounded monthly. On
the 23rd of October, 2013 you withdraw $5 000 and deposit $2 000 of this amount in Barclays at
9.15% pa compounded daily and the other $3 000 in Stanbic at 1.13% pa compounded weekly.
On the 16th of December, 2013 you close all three accounts. How much do you receive? [10
MARKS]
2(b) Suppose James Banda owes the following amounts to his bank:
1. Ten months ago he borrowed $12 000 at 9.42% pa compounded daily. This money is
now due in 4 months time from now.
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DR G MUPONDA

2. Five months ago he also borrowed $9 000 at 8.25% pa compounded quarterly. This
money is due in 8 months time from now.
James negotiates with his bank to pay back the money under the following terms:
1. Pay back $8 000 now and the remainder to be rescheduled for 15 months from today.
2. A new interest rate of 11% pa compounded monthly will be applied to all obligations
for the extended period.
What will be the size of James second payment?[10 MARKS]

QUESTION THREE [20 MARKS]

3(a) A firm is intending to buy an office block at a cost of $80 000. The company is required to
make a cash deposit of 15% on the property with the balance being financed by a 10-year
mortgage from ABC Building Society at an interest rate of 17% per year compounded quarterly.
i.
ii.
iii.
iv.

What is the amount of the down payment on the property? [2 MARKS]

Determine the amount of the quarterly payment [3 MARKS].
Show the first four lines of the amortisation schedule for the loan [3 MARKS].
What equity does the firm have on the property after 6 years? [2 MARKS]

3(b) Your company borrows $100 000 by way of a bond under the following conditions:
The bond is redeemable at par after five years with a coupon rate 11% per year, payable
semi-annually.
The borrower must set up a monthly sinking fund which will earn a return of 13% per
year, compounded weekly.
Required:
Set up the sinking fund (show the first five lines only) and calculate the annual cost of servicing
the loan.[10 MARKS]

QUESTION FOUR [20 MARKS]

Your firm is considering a project with the following expected cash flows:
YEAR
0
1
2
3
4
5
CASH FLOW ($) - 16 000 2 000 3 400 5 100 6 300 7 100
25% of the capital outlay of $16 000 will consist of a loan at an interest rate of 14% per year and
the balance will be raised by issuing shares on which the investors require a return of 11%. The
tax rate is 30%.

DR G MUPONDA

Required:
Evaluate the risk and economic viability of the project using the following measures [5 MARKS
EACH]:
i.
ii.
iii.
iv.

Payback period
Net Present Value (NPV)
Internal Rate of Return (IRR)
Modified Internal Rate of Return

4(a)Why would you say that the NPV is a superior measure of project viability compared to the
IRR? [5 MARKS]
QUESTION FIVE [20 MARKS]
5(a) Sunshine Ltd has in issue a twenty-year redeemable bond with a par value of $1 000 and a
semi-annual coupon of 7.23% per year. The bond is currently trading at a yield to maturity of
8.12% per year and has 11 years to maturity. [10 MARKS]
Required: Calculate the current market value of the bond.
5(b) The equity of Mdala Ltd is trading at a beta coefficient of 1.2. The Treasury Bill Rate is 9%
per year and the average rate of return on the market index is 16%. The companys earnings and
dividends have been growing at a rate of 10% per year but this growth rate is expected to slow
down to 7.64% per year. The dividend paid this year was 20 cents per share.
Required: Calculate the intrinsic value of the companys shares [10 MARKS]