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Fnce 412:Security Valuation And Portfolio Selection August 2010 Question Paper

Fnce 412:Security Valuation And Portfolio Selection August 2010

Course:Bachelor Of Commerce

Institution: Kabarak University question papers

Exam Year:2010

KABARAK UNIVERSITY
UNIVERSITY EXAMINATIONS
2009/2010 ACADEMIC YEAR FOR THE DEGREE OF
BACHELOR OF COMMERCE
COURSE CODE: FNCE 412

INSTRUCTION

1. Answer questions ONE and any other TWO questions.
2. Time allowed is 2hours hours.
3. Show all your workings.

QUESTION ONE COMPULSORY (30 MARKS)
a. Discuss the reason OR cause why there may be an agency conflict between bond
holders (lenders) and the management of a company and explain FOUR ways of
minimising the conflict. (10 marks)

b. One of the three pillars of Kenya Vision 2030 is to maintain a sustained economic
growth of over 10% per annum over the next 25 years. Explain FOUR ways that the
Capital Markets Authority (CMA) can help towards the achievement of this objective
of the Vision 2030. (8 marks)

c. Using examples where appropriate explain whether derivatives are in use in the Kenyan
economy. (6 marks)

d. What is the difference between the following terms
i. Financial facilitation and financial intermediation.
ii. Margin trading and short selling.
iii. Secondary offer and secondary market.
(6 marks)

QUESTION TWO (20 MARKS)
a. Clearly define the meaning of an efficient capital market and describe the three theories of
Efficient Market Hypothesis (EMH). (10 marks)

b. Red Card Ltd is a company operating in telecommunication industry in Kenya. The
company has just paid an interim dividend of shs 3 per share for the half year 2010 and
expects that due to the referendum campaigns, an improved final dividend of shs 7 per
share will be declared. Future dividend growth rate is expected to be 5% for the first 5
years, 8% for the next 3 years and thereafter 7 % forever. The company has a ß of 0.745.
The average return in the market is currently 12% and Treasury bill rate is 10%.
Required
Determine the value of the share and the price earning ratio. (10marks)

QUESTION THREE (20 MARKS)
a. The current stock price of X ltd is $100. The exercise price of an option on the stock is
$105. and the remainder time to expiration is 3 months. The option is currently selling at
$90. If the continuously compounded annual interest rate is 0.12 and stock price volatility
is 0.62, determine the value of the option. (8 marks)

b. An investor is interested in trading in options in order to earn short term benefits. Explain
to him four naked option strategies that he can use to minimize losses while trading in
options. (8 marks)

c. State any four limitations of Black and Schools Option Pricing Model. (4 marks)

QUESTION FOUR (20 MARKS)
a. Explain THREE main methods of valuing real estates (8 marks)

b. Green Card Property Ltd constructed a new office Block in Nakuru town in 2010. The building
will be occupied from January 2011 and is expected to produce a net operating income of shs
1,500,000 per annum. The Building is expected to last for 30 years and the net operating income is
expected to grow by 10% after every 10 years. The investor expects an Internal Rate of Return of
12% annually. The salvage value of the building is shs 200,000. (8marks)

Required:
Determine the value of the property. (8 marks)

c. State Four the limitations of investment in real estates. (4 marks)

Fnce 412:Security Valuation And Portfolio Selection August 2010 Question Paper

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