## QUESTIONS ON PORTFOLIO RETURN AND FINANCIAL MANAGEMENT

QUESTION ONE

a. Explain the key issues to be considered by a Financial Manager in the day to day operations of an enterprise.(10 marks)

b. Discuss the merit of the notion that the Finance Manager's aim is to maximise the value of the firm in light of the views expressed under the agency theory.(10 marks)

(Total 20 marks)

QUESTION TWO

Taabu Ltd has an investment opportunity for which the outlay and cashflows are uncertain. Analysis produced the subjective probability assessments as follows:

Subjective Probability Estimates

OUTLAY ANNUAL CASHFLOWS

Probability Amount (Shs) Probability Amounts (Shs)

0.4 240,000                 0.2 42,000

0.3 300,000                 0.5 48,000

0.2 360,000                 0.3 54,000

0.1 420,000

The cost of capital is assumed at 12 percent, life expectancy of ten years and salvage value zero.

REQUIRED:

a. Construct a decision tree for this investment to show probabilities payoffs and expected Net Preset Value (NPV).(10 marks)

b. Calculate the expected NPV using the expected cashflows and the expected outlays. (5 marks)

c. What is the probability of, and the NPV of the worst possible outcomes?(3 marks)

d. What is the probability of, and the NPV of the best possible outcomes?(3 marks)

e. Compute the probability that this will be a good investment.(3 marks)

(Total 24 marks)

QUESTION THREE

a. Outline the major government policies that influence business decisions and financial management.

(6 marks)

b. Briefly, illustrate how government activities affect companies in achieving their financial objectives. (Give suitable examples in your country).(6 marks)

QUESTION FOUR

Maxi Ltd. is considering acquiring Mini Ltd. Selected financial data for the two companies are as follow:

Max Ltd. Mini Ltd.

Annual sales (millions) Shs 750 Shs 90

Net income (millions) Shs 60 Shs 7.50

Ordinary shares outstanding (millions) 15 3

Earnings per share (EPS) Shs 4 Shs 2.50

Market price per share Shs 44 Shs 20

Both companies are in the 40% income tax bracket.

REQUIRED:

a. i. Calculate the maximum exchange ratio Max Ltd. should agree to if it expects no dilution in EPS.(6 marks)

ii. How much premium would the shareholders of Mini Ltd. receive on a price of Shs 24.20.

(4 marks)

b. Calculate Maxi Ltd's post merger EPS if the two companies settled on a price of Shs 24.20. (4 marks)

c. Calculate Max Ltd's EPS if Mini Ltd. shareholders accept one Shs 6 convertible preference share (stated value Shs 100) for every 5 ordinary shares they own.(4 marks)

d. Calculate Maxi Ltd's EPS if every 50 shares of Mini Ltd. are exchanged for one 8% debenture of par value Shs 1,000.(4 marks)

e. What one fundamental assumption have you made in your calculations in b., c. and d. above?

(2 marks)

(Total 24 marks)

QUESTION FIVE

Abba investments wants to invest in securities C and D of firms in two different industries. The following information relates to the two securities.

C             D

Expected return                               14%                12%

Standard deviations                         5                      3

Beta                                               1.70                  1.20

Amount of money invested    Shs 720,000      Shs 480,000

REQUIRED:

a. Calculate the expected portfolio return.(5 marks)

b. Calculate the beta of the portfolio.(5 marks)

c. Explain what happens to the portfolio risk if the returns of the two securities are:

i. Perfectly positively correlated.(5 marks)

ii. Perfectly negatively correlated.(5 marks)

(Total 20 marks)