Question

QUESTION Mr JABARI is the Director-General of WBG Ltd an investment private company with 100 shareholders. Last week Mr Jabari met with his old friend Mr Jongo who is the CEO of ABC company listed at DSE. The two friends had a lot to discuss regarding different investment opportunities available, among them the following interested Mr. Jabari; Purchasing shares of ABC Company whose current price is TZS 1000 per share. ABC Company has just paid a dividend of 80Tshs per share which is expected to grow at 10% per year for the next 3 year, then will drop to 8% for further 2 years before it stabilizes at 5% for infinity. According to Mr Jongo, these shares are worth purchasing and will provide suitable returns given the 15% required rate of return of WBG Ltd.

Answer 1

Year Cash Flow PV of Cash Flo Discounting F w actor (cash flow*dis [1/(1.15^yea counting facto r) 2 3 80+10%= 88+10%= 96.8+10%= 106.48+8%= 114.9984+8%= 124.1983+5%= Terminal Value= (130.4082+5%)/ (15%-5%) 88 96.8 106.48 114.9984 124.1983 130.4082 0.86956522 76.52173913 0.75614367 73.19470699 0.65751623 70.01232843 0.57175325 65.75070844 0.4971767461.7484914 0.4323276 56.37905737 6 6 1369.286 | 0.4323276 591.9801677 Expected Share Price toda 995.5871995 =sum of PVs LUI VS

(ii)

Year 3 Year 4 Year 5 144000000 | 172800000 207360000 57600000 69120000 82944000 34560000 41472000 49766400 Year 1 Year 2 Sales 100000000 120000000 Operating Co st 40000000 48000000 (sales*0.4) Variable Cost 24000000 28800000 (operating co sts*0.6) Fixed Costs operating co 16000000 19200000 sts-variable cl osts) Net Profit (Contribution- 6000000072000000 Fixed Costs) Depreciation (Fixed costo. 3200000 3840000 23040000 27648000 33177600 86400000 103680000 124416000 4608000 5529600 6635520 2) Cash Flow (net profit+de preciation) 63200000 75840000 91008000 109209600 131051520 PV of Increme Discounting F ntal Cash Flow actor [1/(1.1^year)) (cash flow*dis counting facto S Year Cash Flows 0 -285000000 63200000 75840000 91008000 109209600 131051520 100000000 - 4 1 -285000000 0.90909091 57454545.45 0.82644628 62677685.95 0.751314868375657.4 0.6830134674591626.26 0.62092132 81372683.19 0.62092132 62092132.31 NPV= (sum of abov 121564330.6 5 e)

(i) As Expected Share Price is 995.59 i.e. < Current Actual Price i.e. 1000, Purchasing share is NOT FEASIBLE

(ii) As NPV is Positive, Investing in the project IS FEASIBLE

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