G MUPONDA CORPORATE FINANCE : BS 204 FAQs

1. At what simple interest rate must $5 000 be invested to accumulate to $20 000 at the
end of 10 years?

2. You deposit $15 000 into a savings account. How much will you have saved in the
bank after three years if interest is compounded monthly at 15% per year?

3. How long will it take $30 000 to accumulate to $67 500 if interest is compounded
weekly at 24.50 per year?

4. What is the effective interest rate for 18.75 per year compounded every three months?

5. James Banda has the following three options for borrowing money from the bank:
a. 45.25% per year, compounded semi-annually,
b. 45.00% per year, compounded quarterly.
Using continuous compounding, advise him of the better option.

6. Mr Damba has to pay the following amounts to Mr Zhanje:

$100 000 three months from now,
$150 000 one year and three months from now,
$200 000 two years from now.
Mr Damba asks Mr Zhanje to reschedule the payments by making two payments as
follows : The first payment at the end of the first year and the second, which will be twice
the size of the first, at the end of 21 months. If interest is calculated at 20.59 pa,
compounded quarterly, what is the size of each payment?

7. The following amounts are deposited into an investment at the end of each year. The
interest rate is 24% per year compounded once per year. Determine their present value:
YEAR AMOUNT ($)
1–4 120 000
5 – 10 300 000
11 – 15 450 000

8. Show the first three lines of an amortization schedule for a loan of $500 000 that is
repayable at quarterly intervals for 12 years. The interest rate is 28.26% per year
compounded semi-annually.

9. You deposit $20 000 into a bank account that pays simple interest at 6.79% per year.
How much will you have in your bank account after 2 years, 5 months and 17 days?

10. On the 23rd of July, 2009 you deposit $100 into NBR Bank at 214% per year
compounded once per year. You then withdraw this money from the bank on the 17th of
December, 2009. How much do you receive?

11. You open an account with Stanbic bank and deposit $100 at an interest rate of 12%
per year compounded monthly. After 7 months, you withdraw $80 from the account and
deposit $30 in Barclays Bank at a rate of 14%5 per year compounded semi-annually and

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 G MUPONDA CORPORATE FINANCE : BS 204 FAQs

the other $50 in ABC Bank at a rate of 16% per year compounded daily. After another 5
months you close all three accounts. How much do you receive?

12. Your employer deducts $150 from your salary at the end of each month as your
pension contribution. The manager of the pension fund invests your contributions to earn
a return of 11.22% per year compounded monthly. What is the size of the lump sum that
will receive if you contribute for the next seven years?

13. Find the present value of an annuity of $120 per quarter for 8 years if the interest rate
is 4.5% per year compounded quarterly.

14. What is the effective annual rate for 134% per year compounded daily?

15. Find the future value of $150 if the interest rate is 7% per year continuously
compounded for 9 months.

16 Describe the concept of the beta coefficient and explain how it is derived.

17. Describe the investment strategy for an investor holding the following securities:
MARKET SENTIMENT BETA COEFFICIENT
Bullish 0.80
Bearish 1.20

18. Which of the following securities would you consider to be (a) over-valued, (b),
under-valued (c) correctly valued? Why?
Ri - Rf
(A) (B) (C)

Rm - Ri

19. With the aid of a diagram, explain what is meant by the security market line.

20. A company has just paid dividend of $20 per share. The following dividends and
earnings have been reported over the past five years:
YEAR DPS EPS
2001 $2.50 $5.60
2002 $2.69 $7.42
2003 $3.40 $7.84
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2004 $3.60 $8.90

2005 $3.80 $8.95
The required rate of return on the company’s equity is 25%.
Required :
Calculate the intrinsic market value of the share and explain some of the misgivings that
you might have with regards to the calculation that you have just made.

21 The following information was reported in the financial press regarding the
performance of XZ Ltd. this year.
i. Net profit after tax, $5 000
ii. Shareholder’s equity, $25 000
iii. Number of shares in issue, 1 000
iv. Dividend, $2 400.
v. Beta, 1.20.

The average rate of return on the ZSE Industrial Index was 22% whilst the Treasury Bill
Rate was 10%.
Required:
Calculate the value of XZ’s share.

22. Calculate the future values of the following amounts (2 marks each)
a. An amount of $10 000 left in the bank for 3 years, 7 months and 62 days. Use a
simple interest rate of 6.26% per year.
b. An amount of $10 000 deposited into an account at the end of each month for the
next 5 years. Use an interest rate of 22.45% pa compounded monthly.
c. An amount of $1 000 deposited at the end of each month for the next 3 years. Use
an interest rate if 340% compounded daily.
d. An amount of $1 000 left in the bank for 7 months and continuously compounded
at 9% per year.

23. An amount of $20 000.00 accumulated to $35 500.00 after 3 years and 9 months.
Calculate the interest rate per year if interest is compounded monthly.( 2 marks)

23. You make payments of $5 000 into an investment at the end of every three-month
period for the next eight years. The interest rate on your investment is 19.25% pa
compounded semi-annually. Calculate the accumulated value of these payments at the
end of the eight-year period.( 5 marks).

24. You deposit $12 000 into Barclays bank on the 6th of May, 2008. The interest rate is
20% per year compounded daily. On the 9th of July, 2008 you withdraw $6 000 from this
account and deposit the money into CBZ at 25% per year, compounded monthly. On the
14th of October, 2008 you close both accounts. How much do you receive? ( 10 marks)

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25. You intend to deposit $100 000 into an investment so that it will accumulate to $350
000. The interest earned will be 22.45% per year compounded daily. How long will it
take you to accumulate this amount? ( 5 marks)

26. Mr Gonzo has to pay the has to pay the following amounts to Mr Tsuro.
$100 000 four months from now, at 20% pa, compounded monthly.
$40 000 seven months from now, at 24% pa compounded daily.
$79 000 ten months from now at 30% pa compounded semi-anually.
Mr Gonzo asks Mr Tsuro to reschedule the three payments by making two payments. The
first payment at the end of nine months from now. The second payment will be twice the
size of the first payment and will be made at the end of twelve months from now.
Determine the size of each payment. The interest rate on all rescheduled payments will be
27% per year compounded daily. ( 15 marks)

27. Your endowment policy states that first payment will be $80 000, due in one year.
Thereafter, the payment will be increased by$5 000 at the end of each year. The policy
matures in 16 year’s time and the expected interest rate is 22.65% per year. Calculate the
amount that will be paid out on maturity. ( 5 marks)

28. You enter into a contract that requires you to pay $100 000 at the $100 000 at the end
of every four months for four years. At the end of the fourth year you will also be
required to pay a lump sum of $500 000. The interest rate is 24% pa compounded
monthly. How much have you borrowed? How much do you still owe after two years?
( 10 marks)

29. A certain financial institution decides to set up a scholarship fund for students at the
University of Zimbabwe. The scholarship will be for $80 000 per year. The money can be
invested to earn 20% per year. How much should the institution donate? ( 5 marks)

31. You enter into a contract under the following terms:

a. Payments of $75 000 at the end of every six-month period for five years, plus
b. A final payment of $20 000 at the end of the fifth year.
If the interest is charged at 28% per year compounded monthly, what is the value of the
contract on the date of commencement? What will be the value of the contract halfway
through its term? ( 10 marks)

31. Show the first three lines of an amortisation schedule for a loan of $100 million
repayable at quarterly intervals for 12 years. The interest rate is 15.25% per year
compounded semi-annaully. ( 15 marks)

32. A company wants to set up a sinking fund for the repayment of a loan of $100 million
at the end of four years. It makes equal deposits at the end of every three months into a
fund that earns interest at 22% per year compounded monthly. Determine the size of each
deposit and construct a sinking fund schedule (the first three lines only).
( 10 marks)

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33. On the 13th of March, 2010 you deposit $1 000 in a bank and withdraw it on the 19th
of August the same year. How much will you receive if the bank is paying a simple
interest rate of 102% per year? (5marks)

34. Mary must pay the bank $2 000 at a simple interest rate of 14% per year which is due
in one year. To lessen her burden, she decides to pay in advance $600 after three months,
and another $800 four months later. If the bank agrees that both payments are subject to
the same simple interest rate as the loan, how much will she have to pay at the end of the
year to settle her outstanding debt?(5marks)

25. How much must you invest at 16% per year, if interest is compounded quarterly, to
yield $10 000 in two and a half years?(5 marks).

4. You invest $10 000 in CBZ at 15% per year compounded quarterly. After 7 months
you withdraw $8 000 from this account and deposit $5 000 in Barclays at 16% per year
compounded monthly and the other $3 000 in Stanbic at 18% per year compounded daily.
At the end of the following 6 months you close all three accounts. How much do you
receive in total? (5 marks).

5. In terms of an agreement with his bank, Jerry makes payments of $1 200 into an
account at the end of every two month period for the next five years. Determine the
accumulated value of these payments if interest is compounded quarterly at 13.5% per
year.(5 marks)

6. Find the effective annual rate for 27% per year compounded daily.(5 marks)

7. Find the future value of $100 after 13 weeks when the interest rate is 107%
continuously compounded.(5 marks)
8. Find the present value of $1 000 expected to be received in 3 years from now. Use an
interest rate of 9.26% per year compounded quarterly.(5 marks)

9. Find the present value of an annuity of $1 000 per quarter when the interest rate is
109% per year compounded quarterly for 3 years.(5 marks).
10. Find the present value of the following amounts. Use an interest rate of 16% per year
compounded daily( 10 marks).
YEARS AMOUNT($)
1-6 5 000
7-10 4 000
11-16 6 000

11. Brighton intends to start a business by borrowing money from the bank at an interest
rate of 18% per year. The bank agrees to advance him the money under the condition that
he will not pay anything for the first three years. Thereafter, he will then pay $20 000 per
year for five years. How much would the bank be willing to advance him under these
conditions? (5 marks).

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12. The following projects has been presented to you for consideration.
PROJECT A
YEAR : 1 2 3 4
CASH FLOWS($) : 1 000 2 500 2 800 3 200
The initial capital outlay for this project is $5 000 and the cost of capital is 15%.
Required:
a). Calculate the payback period, NPV, Profitability Index and the IRR. Form your
calculations, should the project be accepted.(15 marks)
b). Briefly explain the demerits of using the payback period as a method of appraising
capital expenditure projects. (5 marks).

Question two
i. Calculate the yield on a debenture with the following characteristics: Par value, $1 000;
Coupon Rate, 17% ; Current Market Value, $782.00; Years to maturity, 17.
ii. A company has in issue a $2.00, 9% irredeemable preference share which is currently
trading at $3.67. Calculate the required rate of return on the share.
iii. Calculate the market value of a debenture with the following characteristics: Par Value,
$1 000, Coupon Rate, 11% pa (Semi-annual); Years to maturity, 13, Yield, 15%..
iv. A company wishes to raise $100 million by issuing new shares at $3.00 each. A dividend
of 30cents per share will be paid this year. It is expected that dividends will grow at
5% per year in the future. The cost of listing the shares on the stock exchange will be
$3 million. Calculate the required rate of return on the newly issued shares.

Q1 What is the present value of a loan on 5 May if it accumulates to $4 500 on 16August

at a simple interest rate of 15% pa? (3 marks)

Q2. Calculate the future value of $500 after 5 years when the interest rate is 22.58 pa,
compounded:(a) monthly , (b) daily. (6 marks)

Q3. Calculate the future value of a 3-year annuity of $400 per year, deposited at the end
of each year. The interest rate is 16.22% pa, compounded monthly. (3 marks)

Q4. Calculate the present value of a 4-year annuity of $300 pa, deposited at the
beginning of each year, if the interest rate is 10.36% pa compounded quarterly. (3 marks)

Q5. How long will it take $900 to accumulate to $3 000 if the interest rate is 16.89% pa
compounded daily? ( 3 marks)

Q6. Calculate the effective interest rate on 15.22% pa compounded weekly. ( 3 marks)

Q7. Use the concept of continuous compounding to compare the following interest rates
on a loan : (a) 44.22% pa compounded monthly, (b) 43.29 pa compounded daily. ( 6
marks)

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Q8. You owe $9 000 ,due in two months, $15 000 ,due in five months, $20 000 ,due in
eight months, and $5 000 , due in 18 months. You want to pay off your obligations by
three equal installments as follows : the first payment in three months, the second in six
months, and the final payment in ten months from now. Calculate the payments to be
made, assuming that all payments and obligations are subject to 22.79% pa ,
compounded semi-annually. Take 10 months as the comparison date.. ( 9 marks)

Q9. A company wants to set up a sinking fund for the redemption of $500m bonds at the
end of four years. It makes equal deposits at the end of every three months into a fund
that earns interest at 16.26 pa compounded monthly. Determine the size of the deposit
and construct a sinking fund schedule ( the first three lines only). ( 8 marks)

Q10. An investment of $54 000 generates annual cash flows of $9 500 for 8 years.
Calculate the internal rate of return. ( 5 marks)

1. On 15 June, 2006 you buy a note with a face value of $500 000 and a maturity date of
2 August, 2006. The discount rate is 15.55% per year. ( a ) How much do you pay for the
note? ( b ) What is the equivalent simple interest rate on the note? ( 4 marks)

2. Leah must pay her dad $1 000 which is due in one year. She decided to pay $300 after
three months and another $400 four months later. If her dad agrees that both payments
are subject the same simple interest rate as the loan ( 10 % pa), how much will she have
to pay her dad at the end of the year to fully settle her outstanding debt? (2marks)

3. How long will it take for an amount of $300 000 to accumulate to $650 000 if the
simple interest rate is 22% pa? (2 marks)

4. At what simple interest rate must $150 000 be invested to accumulate to $470 000 at
the end of six years? (2 marks)

6. Calculate the present value of an ordinary annuity of $10 000 for 5 years compounded
monthly. (2 marks)

7. How long will it take an investment of $3 000 to accumulate to $5 000 if interest is

compounded every four months at 12% pa? (2 marks)

8. What is the effective interest rate on 15% pa compounded monthly ? (2 marks)

9. Joel Gumbo gets the following quotes for a loan from the bank:
a. 17.50 % pa compounded semi-annually,

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b. 16% pa compounded quarterly

Use the concept of continuous compounding to decide the better option to take. (4
marks)

10. You invest $12 000 for six years at an interest rate of 10.50% pa, compounded
monthly with Barclays. After 4 years and 3 months you withdraw $15 000 from Barclays
and invest it at 12% pa compounded quarterly in CBZ. What is the total accumulated
amount of both investments at the end of 6 years? ( 8 marks)

11. You enter into a contract that requires you to pay $100 000 at the end of every four
months ( three times per year ) for four years. At the end of the fourth year you will also
be required to pay a lump sum of $500 000. The interest rate is 24% pa compounded
monthly. How much have you borrowed? How much do you still owe after two years?
( 12 marks )

12. Show the first three lines of an amortization schedule for a loan of $25 000 that is
repayable at quarterly intervals for 12 years. The interest rate is 15.25% pa compounded
semi-annually. (8 marks).

1. (a) List the advantages and disadvantages of the payback period method of evaluating
investment projects.

(b) Why is the NPV method regarded as a better measure of a project’s performance than
the IRR?

( c ) Why and how may a conflict arise between the NPV and the IRR?

(d). An investment project requires equipment with an outlay of $15 000 and an expected
lifespan of 10 years. The equipment will be depreciated on a straight line basis with no
residual value. The estimated after-tax profits will be as follows:
YEARS Annual After-tax Profits
1-2 $1 100
3-6 $2 000
7-10 $2 500
Required : Calculate the payback period for the project.

(e). Calculate the internal rate of return for a project that generates the following cash
flows :
YEAR CASH FLOW
1 $80 000
2 $110 000
3 $120 000
4 $90 000
5 $70 000

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The project requires an initial investment of $320 000 and the cost of capital is 12%.
Explain why you would accept or reject the project

CORPORATE FINANCE : BS 204

INSTRUCTIONS TO CANDIDATES
Answer all question in Section A and any one question in Section B.

SECTION A ( 60 markrs)
1. At what simple interest rate must $5 000 be invested to accumulate to $20 000 at the
end of 10 years?

2. You deposit $15 000 into a savings account. How much will you have saved in the
bank after three years if interest is compounded monthly at 15% per year?

3. How long will it take $30 000 to accumulate to $67 500 if interest is compounded
weekly at 24.50 per year?

4. What is the effective interest rate for 18.75 per year compounded every three months?

5. James Banda has the following three options for borrowing money from the bank:
c. 45.25% per year, compounded semi-annually,
d. 45.00% per year, compounded quarterly.
Using continuous compounding, advise him of the better option.

6. Mr Damba has to pay the following amounts to Mr Zhanje:

$100 000 three months from now,
$150 000 one year and three months from now,
$200 000 two years from now.
Mr Damba asks Mr Zhanje to reschedule the payments by making two payments as
follows : The first payment at the end of the first year and the second, which will be twice
the size of the first, at the end of 21 months. If interest is calculated at 20.59 pa,
compounded quarterly, what is the size of each payment?

7. The following amounts are deposited into an investment at the end of each year. The
interest rate is 24% per year compounded once per year. Determine their present value:
YEAR AMOUNT ($)
1–4 120 000
5 – 10 300 000
11 – 15 450 000

8. Show the first three lines of an amortization schedule for a loan of $500 000 that is
repayable at quarterly intervals for 12 years. The interest rate is 28.26% per year
compounded semi-annually.

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SECTION B ( 40 marks )

QUESTION ONE
The following information relates to projects A and B, which are mutually exclusive :
CASH FLOW ($000)
YEAR A B
0 - 100 000 - 400 000
1 10 000 250 000
2 20 000 150 000
3 40 000 100 000
4 80 000 75 000
5 100 000 50 000

The cost of capital for both project is 20%.

Evaluate these projects using the following criteria:

1. Payback period.
2. Discounted payback period.
3. Net Present value.
4. Internal rate of return.
5. Modified internal rate of return.

From your evaluation, which of the two projects should be accepted? Discuss some of the
misgivings that you may have with regards to the evaluation criteria used to arrive at your
decision.

QUESTION TWO
A company has an issued share capital of 500 000 ordinary shares of $10 each, with a
current market value cum div of $11.70 per share. It has also issued $2 000 000 of 10%
debentures, which are redeemable at par in two years time and have a current market
value of $105.30 and a par value of $100.00. It also has $1 000 000 of 6% preference
shares, currently priced at $4.00 per share. The preference shares dividend has just been
paid, and the ordinary dividend and debenture interest are due to be paid in the near
future.

The ordinary share dividend will be $600 000 this year and the directors are of the view
that earnings and dividends will increase by 5% per year into the indefinite future.

The fixed assets and working capital of the company are financed by the following:
Ordinary shares of $10 each $5 000 000
6% $10 preference shares $1 000 000
Debentures $2 000 000

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Reserves $3 800 000

$11 800 000

REQUIRED : Advise the management on the cost of capital that they should apply when
evaluating their capital expenditure projects.

BS204 CORPORATE FINANCE

TEST 1
(WEEK-END PROGRAMME)
QUESTION 1.
i.Use the concept of continuous compounding to compare the following interest rates on a
loan
a 122% per year, compounded daily.
b 126% per year compounded monthly (2 MARKS)

ii. You want your investment of $4 000 to accumulate to $8 700 after a period of 2 years,
2 months. At what simple interest rate should you invest this money? (2 marks).
iii. You invested $10 000 in CBZ at 134% pa compounded daily. After 7 months you
withdraw $9 000 from CBZ and invest $6 000 of the money in Barclays at 143% pa
compounded quarterly and the other $3 000 in Stanbic at 154% pa compounded monthly.
After another 8 months you close all three accounts. How much do you receive? (4
marks)

iv. How long will it take an investment of $2 000 to accumulate to $3 700 if the interest
rate is 120% pa compounded monthly? (2 MARKS)

v. Calculate the effective annual rate for 117% pa compounded weekly.(2 MARKS)

vii.Calculate the future value of $1 000 after 7 months using a continuously compounded
rate of 3.22% pa. (2 MARKS)

vi. An insurance broker offers you the following deal: pay $1 000 after one year.
Thereafter, your annual payments will be increased by $150. How much do you receive
after 7 years? The interest rate is 11.22% pa compounded once per year.( 4 MARKS)
vii. Calculate the future value of an annuity of $100 per year for eight years. The interest
rate is 17% pa year compounded once per year and the payments are being made at the
beginning of each year.( 2 MARKS)

viii. Calculate the future value of an annuity of $100 per month for eight years. The
interest rate is 13% pa year compounded monthly. The amounts are being deposited at
the end of each month (2 MARKS)
ix. Calculate the future value of an annuity of $100 per month for eight years. The
interest rate is 21% pa year compounded daily and the amounts are being deposited at the
end of each month (4 MARKS)

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x. Calculate the present value of an annuity of $100 per year for 3 years. The interest rate
is 112% per year compounded once per year and the payments are being made at the
beginning of each year (2 MARKS)
xi. Calculate the present value of an annuity of $10 per week for 10 years. The interest
rate is 11% pa compounded weekly (2 MARKS)

QUESTION 2 (25 MARKS)

The following two projects have been presented to you for assessment:
Project A (Cost of Capital : 12%)
YEAR: 0 1 2 3
4
CASH FLOW($) -10 000 - 3 000 5 000 10 000
8 000

Project B (Cost of Capital : 17%)

YEAR: 0 1 2 3
4
CASH FLOW($) -18 000 15 000 9 000 5 000
0

For each project, calculate:

1. The Payback period,
2. The Net Present value
3. The Profitability Index
4. The Internal Rate of Return.
5. The Modified Internal Rate of Return.

Which project would you select and why?

SECTION B ( 40 marks )

QUESTION ONE
The following information relates to projects A and B, which are mutually exclusive :
CASH FLOW ($000)
YEAR A B
0 - 100 000 - 400 000
1 10 000 250 000
2 20 000 150 000
3 40 000 100 000
4 80 000 75 000
5 100 000 50 000

The cost of capital for both project is 20%.

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Evaluate these projects using the following criteria:

6. Payback period.
7. Discounted payback period.
8. Net Present value.
9. Internal rate of return.
10. Modified internal rate of return.

From your evaluation, which of the two projects should be accepted? Discuss some of the
misgivings that you may have with regards to the evaluation criteria used to arrive at your
decision.

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