UNIVERSITY EXAMINATIONS: 2016/2017
EXAMINATION FOR THE DEGREE IN BACHELOR OF BUSINESS
INFORMATION TECHNOLOGY
BUSS 306 EVALUATION OF BUSINESS INVESTMENTS
MODE: FULL TIME/PART TIME/DISTANCE LEARNING
ORDINARY EXAMINATIONS
DATE: AUGUST, 2017 DURATION: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) Explain the benefits of merger and acquisition. (10 Marks)
b) Explain the main defensive tactics that a company defends itself from hostile takeover.
(10 Marks)
c) Mr. Kanthonzweni has a capital of sh 1,000,000 which he wishes to invest in three sectors of the
economy agriculture, service and manufacturing. The funds will be allocated as follows;
Sector Amount invested
Agriculture 400,000
Service 200,000
Manufacturing 400,000
Details on the possible future economic states, their probabilities of occurrence and the expected return
for each of the sectors is as shown below;
Possible future probability of expected return of each sector
Economic state occurrence
Required;
i) Determine the risk associated with the investment in each of the three sectors above (8 Marks)
ii) Determine the expected portfolio return (2 Marks)
QUESTION TWO
An investor is evaluating six portfolios with the following characteristics;
The expected return on the market portfolio is 12% with an accompanying standard deviation of 4%. The
risk free rate of interest is 5%.
Required:
a) Using the capital market line, advice the investor on which of the above portfolios are efficient and
which are inefficient.
(8 Marks)
b) Illustrate using a well labeled diagram how these portfolios appear on the capital market line (CML)
(8 Marks)
b) In the case of an inefficient portfolio on (a) above state what the standard deviation should be for
efficiency to be achieved with the given expected return.
(4 Marks)
QUESTION THREE
a) Explain the following terms as applicable in merger and acquisitions:
Corporate Restructuring
i. Merger (2 Marks)
ii. Acquisition (2 Marks)
iii. Consolidation (2 Marks)
iv. Absorption (2 Marks)
b) Explain the three types of mergers (6 Marks)
c) Discuss THREE strategies that a company can explore to avoid a hostile takeover
(6 Marks)
QUESTION FOUR
The directors of Jarida limited, wish to use an alternative estimate of cost of capital. They prefer to use
the capital asset pricing model. The following details have been provided;
Portfolio / Return % variance of returns% covariance of returns
Required;
i. Determine the beta coefficient of each portfolio / security and interpret the results of each.
( 14 Marks)
ii. Predict the cost of capital of Jarida limited using the capital asset pricing model.
(6 Marks)
QUESTION FIVE
a) Highlight FOUR uses of capital asset pricing model (CAPM) (4 Marks)
a) Differentiate between portfolio theory and capital asset pricing model (CAPM) (10 Marks)
b) Discuss THREE assumptions of Arbitrage Pricing Theory (APT) (6 Marks)
