UNIVERSITY OF ZIMBABWE

Faculty of Science

Department of Mathematics and Computational

Sciences

Tutorial work and Revision

Corporate finance -2023

Complied by lecturer :Vutete .V

Corporate Finance
Question 1: What are main objectives of financial management? (Marks 20)
Question 2: Explain factors affecting dividends policy. (20 marks)
Questions 3: What are the rationale for merging and acquisitions? (20 marks)
Question 4: Explain the scope of the agency theory. How best can shareholders deal with the
problems of agency relationships? (20 marks)
Questions 5: Briefly explain 5 theories of dividends policy (20 marks)
Questions 6: Explain the forms of business enterprises in Zimbabwe. ( 20 marks)
Question7: What are the sources finance for manufacturing company. ( 20 marks)
Question 8: Why do companies need capital? ( 20 marks)
Question 9

The University wants to invest in two projects X and Y. The cash flows for these projects are
presented below. Assuming the cost of capital is 10%

Year Project X Project Y

0 ($10000) ($10000)
1 $6500 3500
2 $3000 3500
3 $3000 3500
4 $1000 3500
a) Calculate the Payback Period of each project (2 marks)
b) Calculate the net present value (NPV) of each project (4 marks)
c) Calculate the internal rate of returns (IRR) of each project (4 marks)
d) Calculate the discount payback period (DPP) of each project ( 4 marks)
e) Calculate the modified internal rate of return (MIRR) of each project (4 marks)
f) Which project do you choose? Justify your answer (3 marks)
g) What are the characteristics of investment appraisal techniques. (6 marks)

Question 10
a) State 8 assumptions of CAPM (8 marks)
b) Given the beta of the firm's stock is 1.30, the average market return is 34% and the risk-
free rate is 16%. Calculate the required rate of return. ( 5 marks)
c) Briefly describe the applications of CAPM (7 marks)
Questions 11
a) If you deposit $1000 in a saving account that pays 2% interest per year, compounded
annually, how much will you have in the account at the end of 5 years ,10 years and 20
years? ( 4 marks)
b) Suppose you invest $2,000 today and you double your money after five years. What is
the interest rate on your investment? ( 4 marks)

c) Suppose we invest $2000 in an investment that pays 4% interest per year, compounded
quarterly. What will be the future value of this investment at the end of 10 years? (4
marks)

d) Randy wants to borrow money for some home improvements. He has received several
different quotes. Bank A will charge him 14.5% compounded annually, Bank B will
charge him 14% compounded monthly, and his best friend will charge him 13.75%
compounded continuously. Which is the better deal? (4 marks)
e) If you deposit $1000 in a saving account today that pays 8% interest per year, how much
will you have in the account at the end of 10 years if interest is compounded:
i. Annually?
ii. Quarterly?
iii. Monthly?
iv. continuously? [ 4
marks]
Questions 12
a) If the current dividend is $2 per share and that this dividend remains the same every year
forever. If the required rate of return is 10%, calculate the value of a share of stock. 2
marks
b) If dividends just paid are $2 per share, and these will grow at a rate of 6% per
year forever, and the required return on similar dividends is 10% per annum.
Calculate the value of the share of stock. 3 marks
c) An investor is considering purchasing the common stock of Warren Industries, a rapidly
growing boat manufacturer. The investor finds that the firm’s most recent annual
dividend payment was $1.50 per share. She estimates that these dividends will increase at
a 10% annual rate over the next 3 years , after that because of the introduction of a
hot new boat. At the end of the 3 years , she expects the firm’s mature product line to
result in a slowing of the dividend growth rate to 5% per year for the foreseeable
future. The investor’s required return, is 15%. Calculate the intrinsic value of
Warren’s common stock .(10 marks)
d) Consider a bond that has a $1 000 face value, a 6% coupon (paid semiannually), matures
in 6 years, and has a current price of 950. What is the yield-to-maturity on this bond? (5
marks)
Question 13
a) You are presented with an investment that promises $1,000 in ten years. If you consider
the appropriate discount rate to be 6%, based on what you can earn on similar risk
investments, what would you be willing to pay for this investment today? (4 marks)

b) Suppose that the goal is to have $75,000 in an account by the end of four years. And
suppose that interest on this account is paid at a rate of 5% per year, compounded
semiannually. How much must be deposited in the account today to reach this goal?( 4
marks)

c) Suppose you wish to determine the future value of a series of deposits of $1,000,
deposited each year in the No Fault Vault Bank for five years, with the first deposit made
at the end of the first year. If the NFV Bank pays 5% interest on the balance in the
account at the end of each year and no withdrawals are made, what is the balance in the
account at the end of the five years? (4 marks)

d) Consider a five-payment annuity, with payments of $500 at the end of each of the next
five years. .If the appropriate discount rate is 4%, what is the present value of this
annuity? If the appropriate discount rate is 5%, what is the present value of this annuity?
(4 marks)

e) Suppose you want to retire and be able to withdraw $40,000 per year each year for
twenty years after your retirement. If you plan to stop deposits in your retirement account
ten years prior to retirement, what is the balance that you must have in your retirement
account ten years before you retire if you can earn 4% per year on your retirement
investments? (4 marks)
Questions 14

a) Consider a loan of $100,000. If the loan is repaid in four annual installments (at the end
of each year) and the interest rate is 6% per year. Prepare a loan amortization table (5
marks)

b) Using a 7.5% compounded interest rate per period, calculate the future value of a $500
investment: i. One period into the future. ii. Five periods into the future iii. Ten periods
into the future (4 marks)

c) Using a 7.5% compounded interest rate per period, calculate the present value of a $500
investment to be received: One period into the future,. Five periods into the future , Ten
periods into the future .4 marks
 d) If Natalie deposits $1,000 in her savings account and earns 4.5% interest per year: a. How
much would she have after three years if she left the money in the account to earn
compound interest? b. How much interest has she earned? 4 marks

e) Calculate the present value of $10 000 to be received at the end of five years if the annual
interest rate is 6%, compounded semi-annually. 4 marks
Question 15
a) Suppose a bond with a 5% coupon paid semi-annually, five years remaining to maturity,
and a face value of $1 000 has a price of $800. Calculate the yield to maturity on this
bond? 5 Marks
b) The ABC Company bonds have a face value of $1 000, ten years remaining to
maturity, a 5% coupon paid semiannually, and a current value of $688.44. What is the
yield-to-maturity of the ABC bonds? 5 marks
c) Consider a bond that has a 6% coupon (paid semi-annually) and a face value of $1 000.
What is the bond's yield-to-maturity if it has a current price of 110 and:
i. five years remaining to maturity?
ii. ten years remaining to maturity?
iii. twenty years remaining to maturity? [10 marks]
Questions 16
a) The company have the following value of liabilities, preference capital and common
stock.
Sources Book Value Face Value Price
Long term liabilities $180 000 $100 $150
current $75 000 -
liabilities
Preference $135 000 $1 $0.70
Stock
Common $240 000 $0.50 $2.50
Stock
Total value $630 000

The long-term liabilities and the current liabilities have a before tax cost of 26% and
24% respectively. Xltd's preference stock dividend rate is 20%, the beta of the firm's stock is
1.30, the average market return is 34% and the risk-free rate is 16%. Calculate WACC using
book values when the tax rate is 35%. (10 marks)
b)Distinguish between debt and equity as source of finance. (10 marks)
Question 17
a) How long will it take Wendy’s $4,000 investment, compounded at 5% annual interest, to
grow to $6000? (4 marks)
b) Faith is saving money to send her son to college. If he is ten years old now, how much
must she deposit now, at 7%, so that when he turns 18 and goes to college, he will be able
to withdraw $20,000 a year for four years to pay for his college tuition? (4 marks)
c) If you invest $2,000 today and it earns 25% per year, how much will you have in 15
years? (4 marks)
d) At a constant rate of return of 6% per annum, how many years does it take you to triple
your money? (4 marks)
e) For a rate of interest of 7% per annum, convertible monthly, calculate:(i) the equivalent
rate of interest per annum convertible half yearly, and (ii) the equivalent rate of discount
per annum convertible monthly (4 marks)
Questions 18
a) If the current dividend is $2 per share and that this dividend remains the same every year
forever. If the required rate of return is 10%, calculate the value of a share of stock. (2
marks)
b) If dividends just paid are $2 per share, and these will grow at a rate of 6% per
year forever, and the required return on similar dividends is 10% per annum.
Calculate the value of the share of stock. (3 marks)
c) An investor is considering purchasing the common stock of Warren Industries, a rapidly
growing boat manufacturer. The investor finds that the firm’s most recent annual
dividend payment was $1.50 per share. She estimates that these dividends will increase at
a 10% annual rate over the next 3 years , after that because of the introduction of a
hot new boat. At the end of the 3 years , she expects the firm’s mature product line to
result in a slowing of the dividend growth rate to 5% per year for the foreseeable
future. The investor’s required return, is 15%. Calculate the intrinsic value of
Warren’s common stock .(10 marks)
d) Consider a bond that has a $1 000 face value, a 6% coupon (paid semiannually), matures
in 6 years, and has a current price of 950. What is the yield-to-maturity on this bond? (5
marks)

Question 19
a) Suppose you borrow $1 000, with terms that you will repay in a lump-sum of $1 750 at
the end of three years. What is the effective interest rate on this loan? (4 marks)

b) Suppose that you place $1,000 in a savings account that pays 10% compounded interest
per year. How long would it take for that savings account balance to reach $5,000? (4
marks)
 c) How long does it take to triple your money if the interest rate is 5% per year,
compounded annually? (4 marks)
d) What is the present value of a single amount $60000 to be receive in 4 years time ,
assuming interest rate is 12% per year, compounded annually? (4 marks)
e) Suppose you invest $20 000 in an account that pays 12% interest, compounded monthly.
How much do you have in the account at the end of 5 years? (4 marks)

Questions 20
a) Calculate the present value of a four- payment $1 000 ordinary annuity if the interest rate
is 5%. ( 4 marks)
b) Calculate the future value of a four- payment $1 000 ordinary annuity if the interest rate
is 5%. (4 marks)
c) Suppose you deposit $100 today, $200 one year from today, and $300 two years from
today in account that pays 4% interest, compounded annually. What will be the
balance in the account at the end of (a) two years? (b) three years? (6 marks)

d) Suppose that you wish to have a balance in your savings account when you retire
at 65 years of age such that you can make withdrawals of $10 000 each year for 20 years,
starting with your 66th birthday. How much must you deposit on your 35th birthday in an
account paying 5% interest, compounded annually, so that you can meet your goal? (6
marks)
Questions 21
a) Suppose you are considering investing in a straight coupon bond that: promises
interest of $100, paid at the end of each year; promises to pay the principal amount of
$1 000 at the end of twelve years; and has a yield of 5% per year. What is this bond
worth today? 4 marks
b) Suppose a bond has a $1 000 face value, a 10% coupon paid semi-annually, five years
remaining to maturity, and is priced to yield 8%. What is its value? (4 marks)
c) If a preferred share has a $25 par value, a dividend rate of 10.25%, and a required rate
of return of 8%, what is its value? (4 marks)
d) The XYZ bond has a maturity value of $1 000 and a 10% coupon, with
interest paid semi-annually.
i. If there are five years remaining to maturity and the bonds are priced to yield 8%,
what is the bond's value today?
ii. If there are five years remaining to maturity and the bonds are priced to yield 12%,
8 marks

End