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0 -200
1 50
2 60
3 70
4 120
Calculate the payback, the discounted payback, the PI, the NPV and IRR at a required return of 10 percent. State two
2. Consider a Dam Project, which requires an investment of GHC1billion initially, with subsequent cash flows as follows:
YEAR CASHFLOWS(GHC
Millions)
1 200
2 300
3 400
4 -200
5 I
What are the net present value, payback period, discounted payback period and the IRR of the Dam Project if the required of
3. A project costs GHC 2,000,000 and yields annually a profit of GHC 300,000 after depreciation at 12.5% but before tax at
4. You are looking at a three-year project with a projected net income of GHC2000 in Year 1, GHC4000 in Year 2, and
GHC6000 in Year 3. The cost is GHC12, 000 which will be depreciated straight-line to zero over the three-year life of the
and GHC 140 in 3rd year, GHC 150 in 4th year and GHC0020200 in the 5th year. What is the payback period for this machine?
Year 0 1 2 3 4
7. An investment which cost GHC 50, 000 pays GHC 15, 000 from the 1st through to the 5th year. Determine the NPV of this investment if the discount rate
is 12% p.a. should the investor go ahead with this investment or otherwise? Find the IRR of the project.
8. Your company has to choose between two mutually exclusive investments A and B, each of which has a life of four years. Machine A and B cost GHC
50,000 and B GHC45, 000 respectively. The year-end cash flows would be as follows:
1 25000 12000 -
3 20000 24000 -
4 10000 35000 -
At the end of the fourth year, the scrap value of machine A is estimated to be GHC 5000 and that of machine B is GHC 4000. Using a cost of capital of
14% for A and 15% for B, and a net present value criterion, which machine would you recommend to our chief executive officer?
9. You want to venture into a project that will cost GH 50,000 to set up and will generate GHs 8500 per annum indefinitely. If cost of capital is 12% , should
10. You have been consulted by a client to help make an investment decision. Information gathered reveals that the project will generate the following cash
flows from years 1-5 respectively: GHs 20,000; Ghs 34,000; Ghs 43,000; Ghs 32,000; Ghs 23,000. Cost of capital is 23%. If the client wants to make at
least Ghs 25,000 as net present value from the project, what is the maximum amount that can be invested in the project?
11. 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 Ghs 35 million. Phase II will take two years and cost Ghs
40.4 million. Phase III will take three years and cost Ghs 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 Ghs 405 million. Cash inflows of Ghs 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%). Find net present value, profitability index,
discounted payback, payback period.
GHC GHC
0 70000 70000
1 10000 50000
2 20000 40000
3 30000 20000
4 45000 10000
5 60000 10000
Compute the Net Present Value, Profitability Index, and the Internal Rate of Return of the two projects and make decision.
13. Machine A costs GHC100, 000, payable immediately. Machine B costs GHC120, 000, half payable immediately and half payable in one year’s time.
1 20000 -
2 60000 60000
3 40000 60000
4 30000 80000
5 20000 -
With 7% cost of capital, which machine should be selected? Use NPV, payback and discounted payback period.
14. A company is considering the replacement of its existing machine which is obsolete and unable to meet the rapidly rising demand for its product. The
company is faced with two alternatives: (i) to buy Machin e A which is similar to the existing machine or (ii) to go in for Machine B which is more
expensive and has much greater capacity. The cash flows at the present level of operations under the two alternatives are as follows:
0 1 2 3 4 5
Machine A -25 - 5 20 14 14
Machine B -40 10 14 16 17 15
The company’s cost of capital is 10%. The finance manager tries to evaluate the machines by calculating the following: Net Present Value, Profitability Index,
calculation and in the light thereof to advise the finance manager about the proposed investment.
15. Assume a company want to invest in a new machine that cost GHC 400,000 it will be depreciated using straight-line method
over 4 years and can be salvaged for GHC10, 000 at the end of the estimated life of the machine. The working capital would
increase by GHC20, 000 during the life of the new program. If the cost of capital is 12% and the tax rate is 30%, should the
company invest in the machine. The following table shows the revenues and operating expenses.
year 1 2 3 4
1. You bought a bond for GH¢950 one year ago. You have received two coupons of GH¢30 each. You can sell the bond for
GH¢975 today. What is your total dollar return?
2. You bought a stock for GH¢35, and you received dividends of GH¢1.25. The stock is now selling for GH¢40. What is your
dollar return? What is your percentage return?
3. If Big Oil stock over a large number of years return will be 10% in a third of the years, 10% in a further third, and 30% in the
remaining years. What is the arithmetic average of these yearly returns?
4. Your stock investments return 8%, 12%, and -4% in consecutive years. What is the geometric return? What is the sample
standard deviation of the above returns?
5. State and explain the three forms of market efficiency?
6. What is the difference between systematic and unsystematic risk and explain why one of them is rewarded with risk
premium. Also, explain the factors that affect a stock’s expected return.
7. Suppose you have predicted the following returns for stocks A and B in three possible states of the economy.
State Probability Stock A Stock B
Boom 0.3 15 25
Normal 0.5 10 20
recession 0.2 2 1
9. You invest $25,000 in T-bills and $50,000 in the market portfolio. If the risk-free rate equals 2% and the expected market
risk premium is 6%, what is the expected return on your portfolio?
What are the expected return and standard deviation for a portfolio with an investment of GH¢6,000 in asset X and
GH¢4,000 in asset Z?
13. Consider the betas for each of the assets given earlier. If the risk-free rate is 4.15% and the market risk premium is 8.5%,
what is the expected return for each?
security Beta
DCLK 2.685
KO 0.195
INTC 2.161
KEI 2.434
14. You have decided to invest all your wealth in two mutual funds: A and B. Their returns are 15% and 11% for A and B
respectively. You want your total portfolio to yield a return of 12%. What proportions of your wealth should you invest in A
and B?
15. You can form a portfolio of two assets, A and B, whose returns have the following characteristics
stock E(r) SD correlation
A 0.10 0.20 0.5
B 0.15 0.40
If you demand an expected return of 12%, what are the portfolio weights? What is the portfolio’s standard deviation?
16. You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash
flows (in millions of cedis):
Years from After-tax cash flow
now
0 (40)
1-10 15
The project’s beta is 1.8. Assuming that rf = 8% and E(rm) = 16%, what is the net present value of the project?
Use the table to calculate for the beta
Year Market return DKM return
1 -8 -11
2 4 8
3 12 19
4 -6 -13
5 2 3
6 8 6
18. According to CAPM, the expected return on a risky asset depends on three components.
Describe each component and explain its role in determining expected return
19. What is the expected return and variance on a portfolio which is invested 25 percent in stock A, 55 percent in stock B, and
the remainder in stock C?
20. A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset currently earns 5.1 percent. The beta of a
portfolio comprised of these two assets is 0.85. What percentage of the portfolio is invested in the stock?
21. The following information relates to Baba ltd’s pay-offs for next year:
probability Dividend(Ghc) Stock price (Ghc)
Boom .3 5 195
Normal economy .5 2 100
recession .2 0 0
The company goes out of business if a recession occurs. Suppose the stock is selling for Ghc 90 today: find
a. Expected rate of return to Baba’s shareholders
b. Standard deviation of Baba’s returns
c. With the information provided above on Mansa ltd, compute the following
i. The expected return and standard deviation of a portfolio half invested in Mansa and half in Baba
ii. Show that the portfolio standard deviation is lower than the individual stocks’ and explain why this happens
1. If a preferred stock pays dividends of GHC1 forever and investors have a required return of 15% with a semi-annual compounding.
What will be the value of this stock?
2. What would you pay for a share of ABC Corporation stock today if the dividend one year from now will be GHC3 per share and
you can sell the stock (after you receive the dividend) for GHC90 a year from today. Assume your required return is 15%.
3. The dividend on Simple Motors common stock will be GHC3 in 1 year, GHC4.25 in 2 years, and GHC6 in 3 years. You can sell the
stock, after you receive the dividend, for GHC100 at the end of 3 years. If you require a 12% return on your investment, how much
would you be willing to pay for a share of this stock today?
4. A stock that pays a constant dividend of GHC1.50 forever currently sells for GHC10.71. What is the required rate of return?
19. Renew it Incor. is preparing to pay its first dividend. It is going to pay GHS 0.45, GHS 0.60, and GHS 1 a share over the next three
years, respectively. After that, the company has stated that the annual dividend will be GHS 1.25 per share indefinitely. What is this
stock worth to you per share if you demand a 10.8% rate of return on stocks of this type?