Business/Financial asset Valuation models

August 2025

3 Questions

Question 1c

Suppose the company in (b) above wants to raise additional Sh.50 million to finance an expansion programme as follows:

30% from retained earnings.
30% from the issue of new ordinary shares at Sh.40 each. A floatation cost of 2% of the issue price will be incurred and discount cost of Sh.3 per share issued will also be incurred.
40% of the additional funds will be raised from the issue of new 12% irredeemable debentures at current market value of Sh.110 each. The firm will incur Sh.10 floatation cost per unit issued.

Required:

(i) Compute the firm’s weighted marginal cost of capital (WMCC).

(ii) Compute the number of ordinary shares to be issued to raise the desired external equity capital.

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Question 1b

Shabana Ltd. is intending to raise additional capital to finance a new project. The current market price per share (MPS) of the company is Sh.44 Cum-Div of the year 2024 declared but not yet paid. For the past six years, the company paid the following stream of dividends:

Year	2019	2020	2021	2022	2023	2024
Dividend per share (Sh.)	3.0	3.2	3.4	3.6	3.8	4.0

The existing capital structure of the firm is as follows:

	Sh."000"
Ordinary share capital (Sh.20 par value)	60,000
Reserves	20,000
14% debenture (Sh.100 par value)	30,000
10% preference share capital (Sh.30 each)	20,000
	130,000

Additional information:

1. The existing 14% debentures are currently selling at Sh.124 cum-interest.

2. The existing 10% preference shares are currently trading at Sh.25 each.

3. Corporation tax rate is 30%.

Required:

Compute the company’s existing overall weighted average cost of capital (WACC).

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Question 4b

Mara Limited is a company quoted at the Securities Exchange and is experiencing a period of rapid growth. Due to this, a momentous growth of 15% per annum is anticipated during the next 5 years. Thereafter, a normal growth rate of 5% per annum is expected indefinitely. The shareholders of the company require a rate of return of 10% per annum on their investments. During the previous year, the company paid Sh.4 per share as dividends.

Required:

Advise an investor interested in Mara Limited on the maximum price to pay per share.

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April 2025

2 Questions

Question 1b

Pivot Ltd. is considering raising an additional Sh.20 million to finance an expansion programme. The firm’s existing capital structure which is considered to be optimal is as follows:

	Sh.“000”
Ordinary share capital	100,000
Reserves	50,000
16% debentures (Sh.1,000 par value)	62,500
14% preference shares capital (Sh.20 per value)	37,500
	250,000

Additional information:

The firm expects to generate Sh.4 million from retained earnings for this expansion programme.
Additional new ordinary shares will be issued at Sh.90 each subject to a floatation cost of Sh.10 per share. The most recent dividend paid by the company is Sh.4 per share. The firm’s dividends are expected to grow at the rate of 5% per annum in perpetuity.
The company will issue new 16% debentures at a price of Sh.1,100 with a floatation cost of Sh.5 per debenture.
New 14% preference shares will be issued at Sh.30 with a floatation cost of Sh.2 per share.
Corporation tax rate applicable is 30%.

Required:

(i) The cost of retained earnings.

(ii) The cost of new ordinary share capital.

(iii) The cost of new 16% debentures.

(iv) The cost of new preference shares.

(v) The company’s weighted marginal cost of capital (WMCC).

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Question 2b

Montage Limited’s ordinary shares are currently trading at the securities exchange at Sh.30 each. The firm is considering raising additional capital to finance an expansion programme. The board of directors has proposed to raise the funds using a rights issue.

The expansion programme is expected to cost Sh.5,000,000. This investment will generate additional net operating cash flows of Sh.1,700,000 each year for a period of 5 years.

This information has not been released but shall be released upon announcement of the rights issue. The firm has in issue 2,000,000 ordinary shares. The cost of capital is 12%.

Required:

Calculate the cum-right market price per share of the company.

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December 2024

3 Questions

Question 2a

Outline FOUR applications of cost of capital to a firm

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Question 2c

Lama Ltd. currently pays a dividend of Sh.2 per share on its ordinary shares. The company expects to increase the dividend at an annual rate of 20% for the first four years and at 13% annual rate for the next four years and then grow the dividend at an annual rate of 7% thereafter to perpetuity. This phased-growth pattern is in keeping with the expected life cycle of earnings. The company require a 16% return to invest in these shares.

Required:

Determine the value of Lama Ltd. shares using the Gordon’s growth model.

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Question 3a

Distinguish between “Fundamental theory” and “Random walk theory” in relation to valuation of financial assets.

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April 2024

1 Questions

Question 2b

Sophia Wambia intends to invest Sh.2,000,000 in a 12% debenture for 3 years. The current market value of the debenture is Sh.80 per debenture. The required rate of return on the debenture is 10% and the par value is Sh.100.

Required:

Advise the investor on whether or not to invest in the debenture.

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August 2023

1 Questions

Question 4c

Zora Ltd., a securities market listed company has the following recent financial information:

	Sh.“000”
Profit after tax (earnings)	99,000
Dividends	60,000

Statement of financial position information:

	Sh.“000”	Sh.“000”
Non-current assets		892,500
Current assets		187,500
Total assets		\(\overline {\underline {\underline {1,080,000}}}\)
Current liabilities		105,000
Equity:
Ordinary shares (Sh.1 par value)	120,000	-
Reserves	\(\underline {615,000}\)	735,000
Non-current liabilities:
6% bank loan	60,000	-
8% bonds (Sh.100 par value)	\(\underline {180,000}\)	240,000
Total equity and liabiltieis	-	\(\overline {\underline {\underline {1,080,000}}}\)

Additional information:

Financial analysts have forecast that the dividend of the company will grow in the future at a rate of 4% per year. This is slightly less than the forecast growth rate of the profit after tax (earnings) of the company, which is 5% per year.
Considering the risk associated with expected earnings growth, earnings yield of 11% per annum can be used for valuation purposes.
Zora Ltd. has a cost of equity of 10% per annum and a before tax cost of debt of 7% per annum.
The 8% bonds will be redeemed at par value in six years’ time and the company pays tax at an annual rate of 30% per annum.
The ex-dividend market share price of Zora Ltd. is Sh.8.50 per share.

Required:

Calculate the value of Zora Ltd. using the following valuation methods:

(i) Net asset value method.

(ii) Dividend growth model.

(iii) Earnings yield method.

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April 2023

1 Questions

Question 2c

Umi Limited is contemplating to issue 8% bonds redeemable at Sh.100 par value in three years time. Alternatively, each bond may be converted on that date into 30 ordinary shares of the company. The current market price per share is Sh.3.30 and this is expected to grow at a rate of 5% per annum. The company’s cost of debt is 6% per annum.

Required:

Compute the following:

(i) Market value of the bond assuming conversion occur after 3 years.

(ii) The floor value of the bond assuming redemptions occur at par.

(iii) The conversion premium per share.

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December 2022

2 Questions

Question 4b

Outline FIVE factors that influence the price of a listed company’s share.

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Question 2a

Dopco Ltd. has provided the following summary of statement of financial position for the year ended 30 September 2022:

	Sh. “000”	Sh. “000”	Sh. “000”
Non-Current Assets:
Freehold land and buildings			320,000
Plant and machinery			160,000
Equipment			40,000
			520,000
Goodwill			40,000
			560,000
Current Assets:
Inventory		160,000
Trade receivables		120,000
Short term investments		30,000
Cash		10,000
Current Liabilities:
Trade payables	120,000
Taxation	40,000
Proposed ordinary shares dividends	40,000	(200,000)	120,000
			680,000
Equities and liabilities
12.6% long-term bonds			(120,000)
Deferred Taxation			(20,000)
			540,000
Ordinary shares of Sh.10 each			160,000
Reserves			280,000
			440,000
6% preference shares			100,000
			540,000

Required:

(i) Determine the value of each ordinary share using the Net Asset value basis of valuation.

(ii) Outline THREE reasons for valuing securities of a company.

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August 2022

2 Questions

Question 2b

Distinguish between the following terms as used in finance:

(i) “Agency cost” and “agency problem”.

(ii) “Intrinsic value” and “market value”.

(iii) “Liberal credit policy” and “conservative credit policy”.

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Question 5c

Koki Ltd. recently paid a dividend of Sh.2.50 per share. The dividend is expected to grow at a rate of 15% per annum for the first three years, then at a rate of 10% per annum for the next 2 years after which the dividend will grow at a rate of 5% per annum to perpetuity. The required rate of return for the ordinary share is 12%.

Required:

The intrinsic value of the ordinary share of Koki Ltd.

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April 2022

1 Questions

Question 1d

You are on attachment in an investment firm and the following information regarding investments has been provided to you by a company whose earnings per share (EPS) in the current financial year was Sh.8. The company adopts a 60% payout ratio as its dividend policy.

The company is considering two investment options as follows:

Option 1:

The firm has an investment opportunity which, if undertaken, the growth rate in dividends will be 10% per annum for the next 3 years. The growth rate will fall to 8% per annum for the next 2 years after the first 3 years and then stabilise at 6% per annum thereafter.

Option2:

The firm can continue with the current investments and the growth in dividends will continue at the rate of 10% per annum in perpetuity.

Required:

Assuming the required rate of return is 18%, advise the company on the option to take.

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Pilot December 2021

1 Questions

Question 1c

KUDS Ltd.’s current earnings per share (EPS) is Sh.24. The firm adopts a 40% dividend payment ratio as its dividend policy. The firm has in issue 10,000,000 ordinary shares. The existing capital structure of the firm is given as follows:

	Sh. “000”
Ordinary share capital	1,600,000
Retained profits	600,000
Share premium	200,000
12% debt	800,000
	3,200,000

Additional information:

1. The expected rate of return on market portfolio is 15%.

2. The risk free rate of return is 10%.

3. The firm's equity beta coefficient is 1.4.

Required:

(i) Using the capital asset pricing model (CAPM), determine the minimum required return on the company's equity shares.

(ii) Using the dividend growth model, compute the current value of each equity share.

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December 2021

1 Questions

Question 1d

The following data was extracted from the financial records of Faraja Ltd:

Earnings before interest and tax (EBIT)	Sh.400,000,000
Dividend payout ratio	40%
Number of outstanding ordinary shares	100,000,000
Equity capitalisation rate	15%
Return on investment (ROI)	12%
Corporate tax rate	30%

Required:

The value of Faraja Ltd.'s ordinary share using the Gordon model.

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September 2021

1 Questions

Question 3b

Hakika Ltd. is a newly listed company in the local Securities Exchange. The company has 1 million ordinary shares trading at Sh.49.50 per share. To finance a restructuring exercise, the company requires Sh.7,855,000. To raise the amount, the company intends to issue a one for five rights issue at a subscription price of Sh.39 per share. The finance manager has projected that upon restructuring, the company's annual cash inflows would increase by Sh.965,000.

In the previous financial year, the company paid a dividend of Sh.5 per share. The dividend and the company's earnings are expected to grow by 5% annually upon restructuring.

Required:

(i) The price of the shares after the rights issue but before they start selling ex-rights.

(ii) The theoretical ex-rights price of the shares.

(iii) The theoretical value of the rights when the shares are selling cum-rights.

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May 2021

3 Questions

Question 5d

Ork Limited has an outstanding Sh.2 million face value bond with a 14% coupon rate and 3 years remaining until maturity.

Interest payments are made semi-annually.

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Question 1c(ii)

Hazi Limited expects to pay a dividend of Sh.5.40 per share in one year's time.

Additional information:

The company's dividend payout ratio is 60%.
The shareholders' required rate of return on equity is 15%.
Dividends have been growing at a constant rate in perpetuity.
The company's shares are currently trading at Sh.64.50 per share at the Securities Exchange.

Required:

Advise an investor who holds shares in Hazi Limited whether to buy more shares or to sell the shares.

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Question 1c(i)

Describe four reasons for valuing financial assets.

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November 2019

2 Questions

Question 5c

Virgin Industries had issued 72 million ordinary shares as at 31 March 2019. The company had maintained an annual dividend payment of Sh.180 million including for the year ended 31 March 2019.

On 3 April 2019, the management of the company was awarded a four year tender that would cost Sh.720 million. The directors decided to finance the tender by issuance of ordinary shares at par.

The return on investment (ROI) was expected to be 25% per annum on the cost over the next four years ending 31 March 2023.

All earnings would continue to be paid out as dividends to the shareholders.

The cost of capital is 20%.

Required:

(i) The value of an ordinary share as at 31 March 2019.

(ii) The value of the company as at 3 April 2019 assuming that the management made a decision to undertake the investment.

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Question 3c

Fairland Industries Ltd. has recently been listed on the securities exchange.

The company has a policy of paying out a gradually increasing dividend per share over the past five years, as indicated below:

Year	Earnings per share (EPS) Sh.	Dividend per share (DPS) Sh.
2014 2015 2016 2017 2018	118 125 146 135 160	5.0 5.5 6.0 6.5 7.3

Additional information:

1. The company has recently paid the dividends for the year ended 31 December 2018. The shares are therefore quoted ex-dividend.

2. The management is considering a change in the financing policy whereby greater financing will be provided from internally generated funds. This is expected to reduce the dividend per share to Sh.5 in the year ending 31 December 2019.

3. The growth rate in earnings per share (EPS) and dividend per share (DPS) is expected to increase to 14% per annum from the year ending 31 December 2019.

4. The company's shareholders require a minimum return on investment of 16%.

Required:

(i) Using the dividend growth model, determine the market price per share (MPS) as at 31 December 2018 prior to the change in the financing policy.

(ii) The market price per share (MPS) as at 31 December 2018 under the new financing policy.

(iii) The break-even growth rate in dividend per share (DPS) using the market price cálculated in (c) (i) above.

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May 2019

3 Questions

Question 1b

Clare Mwatata is planning to invest in a long-term project. An investment banker has provided her with the following two investment options:

Option 1: To invest in a corporate bond selling at Sh.875. The bond would be redeemed after 5 years at Sh.1.600.

Option 2: To invest in a 16% debenture with a face value of Sh.100 quoted at Sh.95. The debenture would be redeemed after 5 years.

The minimum required rate of return is 18%.

Required:

Using the yield to maturity (YTM) valuation model, advise Clare Mwatata in making the investment decision.

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Question 1c

An investor holds 1,000 ordinary shares in Upendo Ltd., a company quoted at the securities exchange. The company has been paying average dividends of Sh.1.50 per share annually in recent years. The firm's dividends are expected to grow at a rate of 10% per annum in the coming three years, then grow at a rate of 8% per annum over the next two years and thereafter grow at a constant rate of 5% per annum into perpetuity.

The minimum required rate of return is 12%.

Required:

Using the discounted cash flow valuation method, determine the current value of the 1,000 ordinary shares of Upendo Ltd.

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Question 2b

(i) The management of Amani Limited is considering listing at the securities exchange and intends to undertake valuation of its shares.

The following information is provided:

1. The current earnings per share (EPS) of the firm is Sh.4.

2. The firm has in issue 10 million ordinary shares with a 40% dividend payout ratio.

3. The firm has an equity capital of Sh.200 million with a minimum required rate of return of 18%.

Required:

The current theoretical value of the firm's ordinary shares using dividend growth model.

(ii). XYZ Ltd. has a net tangible assets worth Sh.48 million and a return on assets (ROA) of 12%.

The company expects to receive a profit of Sh. 10 million annually for the next 5 years.

The company has 2 million outstanding ordinary shares.

Required:

The theoretical value per share using the super-profit model.

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November 2018

4 Questions

Question 5b

William Mgunya intends to invest Sh.200,000 in a redeemable 12%, Sh.100 debentures for 3 years. The current market value of the debentures is Sh.80 per debenture.

The required rate of return on the debentures is 10% per annum.

Required:

Advise William Mgunya on whether to invest in the debentures.

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Question 3c

Bemunyonge Ltd. has just paid a dividend of Sh.4 per share. The company expects that the dividend will grow at the rate of 20% per annum for the first two years, then grow at the rate of 10% per annum for the next 2 years and thereafter grow at the rate of 6% per annum into perpetuity. The required rate of return for the company is 16%.

Required:

The theoretical value of the company's share.

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Question 2c

The earnings per share (EPS) and dividend per share (DPS) data for Maraba Ltd. over the last five years are provided below:

Year	Dividend per share (DPS) (Sh.)	Earnings per share (EPS) (Sh.)
2013 2014 2015 2016 2017	1.00 1.10 1.20 1.50 1.80	2.50 2.70 3.00 3.20 3.50

Additional information:

1. A prospective investor is considering buying the shares of this company which are currently selling at Sh.55 each at the securities exchange.

2. The investor's required rate of return is 20%.

Required:

Advise the investor on whether to buy the shares of Maraba Ltd. using Gordon's model.

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Question 1a

Examine four assumptions of the Modigliani and Miller (MM) dividend irrelevance Theory.

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May 2018

3 Questions

Question 1b

Chauringo Limited wishes to expand its business. The company is considering to issue Sh.50 million worth of redeemable bonds denominated in Sh.1,000. The bond's rate of interest is 10% and will mature on 30 June 2028.

The bonds will be issued on 1 July 2018.

The cost of capital is 18% per annum for the whole period.

Required:

(i) The current value of the bond.

(ii) The par value of the bond.

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Question 2a

Explain three assumptions of the Gordon's dividend model.

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Question 3c

The profit after tax of Muhendato Ltd. as at 30 April 2017 was Sh.6,500,000. The company is quoted at the securities exchange and its shares are currently selling for Sh.40 each.

The company's dividend policy is to pay out 40% of its earnings for the year as dividends on its 1,000,000 issued and fully paid up shares.

The company's profit after tax is expected to increase by 15% per year for three years and 8% per year thereafter. Dividends will grow at the same rate as profits ofthe company.

The shares of the company are expected to sell at Sh.64 per share at the end of five years from now.

The cost of capital for the company is 12% per annum.

Required:

Determine whether the shares of Muhendato Ltd. are currently fairly valued, undervalued or overvalued for an investor expecting to sell them after 5 years.

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November 2017

2 Questions

Question 3a

The ordinary shares of Kwekwe Ltd. are currently selling at Sh.60 each at the securities exchange. The company's price-earnings ratio is 6 times.

Kwekwe Ltd. adopts a 40% pay-out ratio as its dividend policy.

It is predicted that the company's earnings and dividends will grow at an annual rate of 10% for the first three years, 5% for the next two years and 4% thereafter in perpetuity.

The investors' minimum required rate of return is 12%.

Required:

(i) The current intrinsic value of the shares.

(ii) Advise the investors based on the result obtained in (a) (i) above.

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Question 5b

Deye Ltd. has provided the following financial results:

Year	Profit after tax (Sh."million")
2014	6.0
2015	6.2
2016	6.3
2017	6.3

The firm's earnings yield is 12%.

Required:

The value of the firm based on the present value of the expected earnings approach.

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May 2017

3 Questions

Question 4b

Luri Limited has a bond that has 3 years to maturity. The bond's par value is Sh.1.000. Coupon payment for the bond is made annually. The current market value of the bond is 120% of par with a coupon of 12%

Required:
The yield to maturity (YTM).

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Question 2a

The following information was extracted from the financial statements of Mwaka Limited

Earnings per share (EPS)
Capitalisation rate
Retention ratio
Internal rate of return

Sh.15
12%
40%
16%

Required:

The price per share under:

(i) Gordon's growth model.

(ii) Walter's model.

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Question 2c

The 10% Sh.100 par value convertible bond of Kurawa Limited is quoted at 142% of par.

The earliest date for conversion is in 4 years' time, at the rate of 30 ordinary shares per Sh. 100 nominal bond. The share is currently trading at a price of Sh.4.15. The annual coupon on the bond has just been paid

Required:

(i) Conversion premium.
(ii) Interpret the answer obtained in (c) (i) above.

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November 2016

4 Questions

Question 4a

Bundacho Ltd. generated Sh.50 million profit after-tax in the previous financial year. The firm adopts 40% payout ratio as its dividend policy. The total number of issued ordinary shares are 10,000,000.

The company has a potential investment opportunity. If undertaken, dividends are expected to grow at the rate of 10% each year for the first 3 years and then stabilise at the rate of 5% each year thereafter in perpetuity.

The investor's minimum required rate of return is 18%.

Required:

The current intrinsic value of the share.

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Question 4b

A firm issued 10% preference shares to raise funds. The shares have a par value of Sh.100 each and are currently selling at Sh.110 each.

The minimum required rate of return by the investors is 8%.

Required:

Explain whether the share is overvalued or undervalued by the market.

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Question 5a

Explain the following terms as used in the bond market:

(i) . Yield-to-maturity (YTM).

(ii). Yield-to-call (YTC).

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Question 5b

Kaoyeni Limited has issued a Sh.10,000 par value 10-year bond with a coupon rate of 12% per annum. The bond is currently trading at Sh.8,830 and is callable at Sh.10.500 after 5 years.

The company pays interest on its bonds semi-annually.

Required:

(i) Yield-to-maturity of the bond.

(ii) Yield-to-call of the bond.

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May 2016

2 Questions

Question 1c

Chigiri Ltd. is a private company which intends to be listed in the securities exchange. The company has recently made a dividend issue of Sh.3.20 per share. This dividend is expected to grow at the rate of 15% per annum for 2 years and then drop to 12% per annum for the next 3 years. Thereafter, the dividend will grow at 6% per annum indefinitely. The required rate of return is 11%.

Required:
The intrinsic value of the share.

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Question 2c

James Chiwende is considering the purchase of a 4-year Sh.1,200,000 par value bond. The bond has a coupon interest. rate of 10% per annum..

The investor's required rate of return is 8%.

Required:
The current value of the bond

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November 2015

4 Questions

Question 1b

Explain the following theories in relation to valuation of financial assets:

(i) Fundamental theory.
(ii) Random walk theory.

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Question 1c

Ngatata Limited has issued a 20-year bond with a nominal value of Sh.1,000 and a coupon annual rate of 9%. Coupon payments are made semi-annually in arrears. The yield to maturity of the bond is 12% per annum.

Required:
(i) The value of the bond.
(ii) The new value of the bond, if yield to maturity goes down to 8% per annum.

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Question 5a

Distinguish between "required rate of return" and "expected rate of return

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Question 1d

Rematex Limited's earnings have been growing at the rate of 18% per annum. This growth is expected to continue for 4 years, after which the growth rate will fall to 12% per annum for another 4 years.

Thereafter, the growth rate is expected to be 6% in perpetuity. The company's last dividend paid was Sh.2. The investors' required rate of return on the company's equity is 15%.

Required:
The intrinsic value of the share.

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Pilot September 2015

2 Questions

Question 4a

A Ltd. is considering taking over B Ltd. The forecasted annual net operating cash flows to be generated by the target firm are given as follows:

Year

1
2
3 - 7
8 - 10
11 - α

Net cash flow (NCF)
Sh."million"
5
8
10
15
12

The firm's minimum required rate of return is 5% above the risk free rate of return. The risk free rate of return 15%.

Required:
The maximum price payable by A Ltd. to acquire B Ltd.

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Question 4c

The shares of Bidii Ltd. are currently selling at Sh.60 each at the securities exchange. Bidii Ltd.'s price earning ratio is 6 times. The company adopts a constant 40% payout ratio as its dividend policy. It is predicted that the company's dividends will grow at an annual rate of 20% for the first three years, 15% for the next 2 years and thereafter at a constant rate of 10% per annum in perpetuity. The investor's minimum required rate of return is 12%.

Required:
(i) Current intrinsic value of the shares of Bidii Ltd.
(ii ) Advise a prospective investor whether or not to buy shares of Bidii Ltd.

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