MAASAI MARA UNIVERSITY
REGULAR UNIVERSITY EXAMINATIONS 2013/2014 ACADEMIC YEAR
THIRD YEAR SECOND SEMESTER
SCHOOL OF BUSINESS AND ECONOMICS
BACHELOR OF BUSINESS MANAGEMENT
COURSE CODE: BBM 313
COURSE TITLE: ASSET VALUATION AND MANAGEMENT
DATE: 24TH APRIL 2014 TIME: 2.00 – 5.00 P.M.
INSTRUCTIONS TO CANDIDATES
Question ONE is compulsory
Answer any other THREE questions
This paper consists of 3 printed pages. Please turn over.
Question 1 (25mks)
a) Explain three approaches to company valuation and give examples 9mks
b) XYZ firm has an expected earnings before interest and tax of shs 1million per annum and interest payment of shs 300,000.The cost of equity is 9.33% while the cost of debt is 6% calculate the value of the firm and the weighted average cost of the firm. 4mks
c) What is a derivative and why is it important in risk management ? 6mks
d) Two companies A and B have the following probability distribution of possible return for the next planning year
State probability Returns (%)
Company A Company B
Boom 0.1 14 20
Recession 0.2 5 -2
Normal 0.4 10 9
Recovery 0.1 9 14
Slow growth 0.2 12 18
Required
I. Calculate the expected covariance of the return 2mks
II. Calculate the correlation between returns of A and B 4mks
Question 2
a) The shares of PZP limited are currently selling at sh. 290 each at the stock exchange. The exercise price for a six month call option is Sh.260 . the prevailing risk free rate is 12% P.a. The variance of ABC Ltd . share price has been 15%.
Required
Using Black and Scholes option valuation model, determine the value of the call option 10mks
b) Explain any five factors affecting the value of a put option 5mks
Question 3
a) Explain clearly the differences between a forward and future 10mks
b) Suppose the domestic currency is the Kenyan shilling and the foreign currency is the US Dollar. Let the spot rate be Kshs. 85 per $, the Kenya interest rate is 6% and the US interest rate be 3%.these rates are continuously compounded and assumed to be fixed over the life of the contract. Calculate the forward price of a six month contract. 4mks
c) Distinguish between an American and European option 1mks
Question 4
a) The return of security j is influenced by three economic factors; Inflation rate, Industrial production and Default risk premium. The expected return of the security j is 13% given the possible change in inflation and when there is unit sensitivity to inflation and zero sensitivity to factors Industrial production and default risk premium. Return of the security j is 10% in relation to change in industrial production with unit sensitivity to industrial production and zero sensitivity to factors inflation and default risk premium Consequently the return of the security j is 6% if there is change in default risk premium when there is unit sensitivity to default risk premium and zero sensitivity to factors inflation and industrial production .The risk free rate is 8% while the beta factors of security j is 0.9, 1.2 and -0.7 with respect to economic factors inflation rate, industrial production and default risk premium respectively
The expected market return is 15% and the CAPM beta factor is 1.1
Required:
Compute the required return of security j using A.P.T and CapM 10mks
b) Describe various applications /uses of capital asset pricing model financial decision making. 3mks
c) Give two limitation of Weighted average cost of capital 2mks
Question 5
a) Discuss any two measures of performance evaluation 10mks
b) Explain two types of mutual funds 3mks
c) What are the advantages of mutual funds 2mks
