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  • 20 Marks

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

The directors of Kenny plc wish to make an equity issue to finance an ₦800 million expansion scheme, with an expected net present value of ₦110 million. It is also to re-finance an existing 15% term loan of ₦500 million and pay off a penalty of ₦35 million for early redemption of the loan.

Kenny has obtained approval from its shareholders to suspend their pre-emptive rights and for the company to make a ₦1,500 million placement of shares, which will be at the price of 185 kobo per share. Issue costs are estimated to be 4 per cent of gross proceeds. Any surplus funds from the issue will be invested in commercial paper, which is currently yielding 9 per cent per year.

Kenny’s current capital structure is summarised below:

₦ million
Ordinary shares (25 kobo per share) 800
Share premium 1,120
Revenue reserves 2,310
Total Equity 4,230
15% term loan 500
11% bond 900
Total Capital 5,630

The company’s current share price is 190 kobo, and bond price is ₦102. Kenny can raise bond or medium-term bank finance at 10 per cent per year.

The stock market may be assumed to be semi-strong form efficient, and no information about the proposed uses of funds from the issue has been made available to the public.

Taxation may be ignored.

Required:

a. Discuss FOUR factors that Kenny’s directors should have considered before deciding which form of financing to use. (6 Marks)

b. Explain what is meant by pre-emptive rights, and discuss their advantages and disadvantages. (4 Marks)

c. Estimate Kenny’s expected share price once full details of the placement, and the uses to which the finance is to be put, are announced. (8 Marks)

d. Suggest two reasons why the share price might not move to the price that you estimated in (c) above. (2 Marks)

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  • 20 Marks

FM – Nov 2021 – L3 – Q3 – Financing Decisions and Capital Markets

Analyze financing alternatives for ZY Plc's new investment and assess rights issue and bond issue implications.

ZY Plc is an all-equity financed, publicly listed company in the food processing industry. The ZY family holds 40% of its ordinary shares, with the remainder owned by large financial institutions. ZY Plc currently has 10 million ₦1 ordinary shares in issue.

Recently, the company secured a long-term contract to supply food products to a large restaurant chain, necessitating an investment in new machinery costing ₦24 million. This machinery will be operational starting January 1, 2022, with payment due the same day, and sales commencing shortly afterward.

The company’s policy is to distribute all profits as dividends. If ZY Plc continues as an all-equity financed company, it will pay an annual dividend of ₦9 million indefinitely, starting December 31, 2022.

To finance the ₦24 million investment, ZY Plc is considering two options:

  1. A 2-for-5 rights issue, where the annual dividend would remain at ₦9 million. The cum-rights price per share is expected to be ₦6.60.
  2. Issuing 7.5% irredeemable bonds at par with interest payable annually in arrears. For this option, interest would be paid out of the ₦9 million otherwise allocated to dividends.

Under either financing method, the cost of equity is anticipated to remain at its current rate of 10% annually, with no tax implications.

Required:

a. Calculate the issue and ex-rights share prices of ZY Plc., assuming a 2-for-5 rights issue is used to finance the new project as of January 1, 2022. Ignore taxation. (4 Marks)

b. Calculate the value per ordinary share in ZY Plc on January 1, 2022, if 7.5% irredeemable bonds are issued to finance the new project. Assume that the cost of equity remains at 10% each year. Ignore taxation. (4 Marks)

c. Write a report to the directors of ZY Plc that includes: i. A comparison and contrast of the rights issue and bond issue methods for raising finance, referencing calculations from parts (a) and (b) and any assumptions. (6 Marks)
ii. A discussion on the appropriateness of the following alternative methods of issuing equity finance in the specific context of ZY Plc: – A placing – An offer for sale – A public offer for subscription (6 Marks)

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  • 20 Marks

FM – Nov 2017 – L3 – Q3 – Financing Decisions and Capital Markets

Calculate theoretical ex-rights price, evaluate shareholder options, discuss EMH implications, and analyze market timing for Peter Plc’s equity financing.

Peter Plc. is a large, listed manufacturing company that is currently considering how best to raise new equity finance. One option is to undertake a public issue of new shares, a course of action recently approved by the shareholders. Alternatively, the company is considering a 1 for 4 rights issue at a 10% discount to the current market price of N5.00 per share.

The company has approached several investment banks regarding the potential new rights issue and public issue. During these discussions, one investment bank stated that the precise timing of a rights issue would be of no consequence. The bank is of the opinion that a public issue of new shares should not be undertaken at the present time. It recommended that if the company wishes to pursue a public issue, it should be deferred for a minimum of six months. The bank explained that, at present, the stock market is significantly undervaluing Peter Plc.’s shares. Consequently, the company would have to issue far more shares to raise the required amount of finance than it would in six months.

The Finance Director of Peter Plc. is uncertain about this and, at a recent board meeting where the matter was discussed, made the following statement:

“According to the Efficient Market Hypothesis, all share prices are correct at all times, with prices moving randomly when new information is publicly announced. The analysts at investment banks are unable to predict future share prices.”

Required:

  1. (a) Calculate the theoretical ex-rights price per share and the value of the rights per existing share, assuming the company chooses this option. (2 Marks)
  2. (b) Discuss the alternative courses of action open to the owner of 500 shares in Peter Plc. as regards the rights issue, in each case, determining the effect on the wealth of the investor. (4 Marks)
  3. (c) Discuss the factors that will influence the actual ex-rights price per share. (4 Marks)
  4. (d) Discuss the meaning and significance of the three forms of the Efficient Market Hypothesis and, with specific reference to these, discuss both the recommendation that the company waits for six months before undertaking a public issue and the Finance Director’s statement. (10 Marks)

(Total 20 Marks)

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  • 15 Marks

CR – Nov 2020 – L3 – Q4a – Business Valuation

Determine share value of Anidaso Ltd using multiple valuation methods including net assets, P/E ratio, dividend yield, and discounted cash flow.

Anidaso Ltd operates in the manufacturing industry in Ghana. The company is in the process of selling some of its shares to the general public to raise funds to expand its operations. Below are the financial statements of the company:

Statement of profit or loss for the year ended 30 September, 2019

GH¢’000
Revenue 122,900
Cost of sales (58,650)
Gross profit 64,250
Selling, general & administration expenses (43,570)
Profit before interest & taxes 20,680
Finance cost (1,680)
Profit before taxation 19,000
Taxation @ 20% (4,750)
Profit after tax 14,250

Statement of changes in equity (extracts) for the year ended 30 September, 2019

GH¢’000
Retained Earnings at October 1, 2018 47,970
Profit for the year 14,250
Dividend paid (6,200)
Retained Earnings at 30 September, 2019 56,020

Statement of Financial Position as at 30 September, 2019

GH¢’000 GH¢’000
Non-current assets
Development expenditure 13,050
Patents 8,200
Property, plant, and equipment 98,750 120,000
Current assets
Inventories 21,700
Trade receivables 12,501
Bank and cash 5,944 40,145
Current liabilities
Trade payables (15,400) 24,745
Net current assets 144,745
Non-current liabilities
10% Debenture loan stock (12,000) 132,745
Equity
Share capital 50,000
Revaluation Surplus 26,725
Retained Earnings 56,020 132,745

Additional relevant information:

  • The share capital of the company is composed of:
    • GH¢000
    • 20% redeemable preference shares 10,000
    • Ordinary shares (issued @GH¢0.20 each) 40,000
    • Total share capital: 50,000
  • A review of the development expenditure indicated that only 50% of it is worthwhile.
  • An independent valuer has placed values on some of the assets of Anidaso Ltd below:
    • Property, plant & equipment: GH¢111,000
    • Inventories: GH¢16,200
    • Trade receivables: GH¢10,000
    • Total value: GH¢137,200
  • Profit forecasts for the next five years of Anidaso Ltd are as follows:
    Year-end 30 September Profit before Tax (GH¢’000) Depreciation Charge (GH¢’000)
    2020 14,900 1,100
    2021 16,000 1,225
    2022 19,250 1,550
    2023 19,800 2,025
    2024 21,550 2,130
  • The patents in the statement of financial position represent a license to produce an improved variety of a product and is expected to generate a pre-tax profit of GH¢10,000 per year for the next five years.
  • Abiola Limited is a competitor company listed on the Ghana Stock Exchange, and data extracted from its recently published financial statements revealed the following details:
    • Market capitalization: GH¢1,000,000
    • Number of ordinary shares: 800,000
    • Earnings per share: GH¢0.20
    • Dividend payout ratio: 80%
  • The cost of capital of Anidaso Ltd is 10%.

Required:
Determine the value to be placed on each share of Anidaso Ltd using the following methods of valuation: i) Net assets
ii) Price-earnings ratio
iii) Dividend yield
iv) Discounted cash flow

 

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  • 5 Marks

AFM – May 2019 – L3 – Q3b – Valuation of acquisitions and mergers

Evaluate whether Ape should proceed with the merger by assessing the financial impact and synergy benefits.

Ape has 2,500 shares outstanding at GH¢10 per share. Bee has 1,250 shares outstanding at GH¢5 per share. Ape estimates that the value of synergistic benefit from acquiring Bee is GH¢500. Bee has indicated that it would accept a cash purchase offer of GH¢6.50 per share.

Required:
Identify whether Ape should proceed with the merger

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  • 15 Marks

CR – Nov 2021 – L3 – Q4a – Business valuations

Determine the value of shares of Aboto Ltd using multiple valuation methods including net assets, price-earnings ratio, dividend yield, and discounted cash flow

Aboto Ltd is a private company in the printing industry. It was established by the Aboto family some twenty years ago with Mrs. Aboto as the Managing Director. The business has grown in size over the years, and the directors are now considering listing the company on the Ghana Stock Exchange. The financial statements of the company for the year 2020 are given below:

Additional Information:

  1. The Share Capital of Aboto Ltd consists of ordinary share capital of no par value issued at GH¢100 per share.
  2. An independent valuer estimated the fair value of the Property, Plant & Equipment at GH¢500,000. Valuation charges of 2% have not been accrued for in the above accounts.
  3. The inventory includes obsolete items worth GH¢5,000 being held despite persistent advice by the auditors to have them written off.
  4. Receivables include an amount of GH¢12,000 resulting from the bankruptcy of a major customer. Aboto Ltd is not likely to realize any amount from this, but the directors have refused to make any provision.
  5. The patents represent a right to sell a special product. This product is expected to generate cash flows of GH¢2,000 per annum indefinitely.
  6. The discounted present value of future cash payments in respect of the debentures is GH¢20,000.
  7. Profits after tax of Aboto Ltd over the past four years were as follows:
    Year Profits (GH¢)
    2019 38,000
    2018 36,000
    2017 32,000
    2016 30,000
  8. A corporate plan prepared by the directors of Aboto Ltd in 2018 included the following positions:
  9. The price-earnings ratio and a dividend yield of quoted companies in the same industry Aboto Ltd operates are 8 and 4%, respectively.
  10. The net assets of Aboto Ltd as at 31 December 2019 were GH¢251,100.
  11. The cost of capital of Aboto Ltd is 20%.
  12. Investing in unlisted securities is about 20% more risky than investing in listed securities.

Required:

Determine the value to be placed on each share of Aboto Ltd using the following methods of valuation:

i) Net assets (4 marks)
ii) Price-earnings ratio (4 marks)
iii) Dividend yield (3 marks)
iv) Discounted cash flow (4 marks)

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  • 6 Marks

FM – NOV 2015 – L2 – Q5d – Portfolio theory and the capital asset pricing model (CAPM)

Calculate the expected return and the value of shares using the CAPM and the dividend discount model.

 I, me, and myself have shares in a company which paid a dividend of GH₵10 to its shareholders. The shares have a beta factor of 1.2. The risk-free rate of return and the market return are 15% and 20% respectively.

Required:
i. Calculate the return on the shares. (4 marks)
ii. Calculate the value of the shares. (2 marks)

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  • 20 Marks

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

The directors of Kenny plc wish to make an equity issue to finance an ₦800 million expansion scheme, with an expected net present value of ₦110 million. It is also to re-finance an existing 15% term loan of ₦500 million and pay off a penalty of ₦35 million for early redemption of the loan.

Kenny has obtained approval from its shareholders to suspend their pre-emptive rights and for the company to make a ₦1,500 million placement of shares, which will be at the price of 185 kobo per share. Issue costs are estimated to be 4 per cent of gross proceeds. Any surplus funds from the issue will be invested in commercial paper, which is currently yielding 9 per cent per year.

Kenny’s current capital structure is summarised below:

₦ million
Ordinary shares (25 kobo per share) 800
Share premium 1,120
Revenue reserves 2,310
Total Equity 4,230
15% term loan 500
11% bond 900
Total Capital 5,630

The company’s current share price is 190 kobo, and bond price is ₦102. Kenny can raise bond or medium-term bank finance at 10 per cent per year.

The stock market may be assumed to be semi-strong form efficient, and no information about the proposed uses of funds from the issue has been made available to the public.

Taxation may be ignored.

Required:

a. Discuss FOUR factors that Kenny’s directors should have considered before deciding which form of financing to use. (6 Marks)

b. Explain what is meant by pre-emptive rights, and discuss their advantages and disadvantages. (4 Marks)

c. Estimate Kenny’s expected share price once full details of the placement, and the uses to which the finance is to be put, are announced. (8 Marks)

d. Suggest two reasons why the share price might not move to the price that you estimated in (c) above. (2 Marks)

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  • 20 Marks

FM – Nov 2021 – L3 – Q3 – Financing Decisions and Capital Markets

Analyze financing alternatives for ZY Plc's new investment and assess rights issue and bond issue implications.

ZY Plc is an all-equity financed, publicly listed company in the food processing industry. The ZY family holds 40% of its ordinary shares, with the remainder owned by large financial institutions. ZY Plc currently has 10 million ₦1 ordinary shares in issue.

Recently, the company secured a long-term contract to supply food products to a large restaurant chain, necessitating an investment in new machinery costing ₦24 million. This machinery will be operational starting January 1, 2022, with payment due the same day, and sales commencing shortly afterward.

The company’s policy is to distribute all profits as dividends. If ZY Plc continues as an all-equity financed company, it will pay an annual dividend of ₦9 million indefinitely, starting December 31, 2022.

To finance the ₦24 million investment, ZY Plc is considering two options:

  1. A 2-for-5 rights issue, where the annual dividend would remain at ₦9 million. The cum-rights price per share is expected to be ₦6.60.
  2. Issuing 7.5% irredeemable bonds at par with interest payable annually in arrears. For this option, interest would be paid out of the ₦9 million otherwise allocated to dividends.

Under either financing method, the cost of equity is anticipated to remain at its current rate of 10% annually, with no tax implications.

Required:

a. Calculate the issue and ex-rights share prices of ZY Plc., assuming a 2-for-5 rights issue is used to finance the new project as of January 1, 2022. Ignore taxation. (4 Marks)

b. Calculate the value per ordinary share in ZY Plc on January 1, 2022, if 7.5% irredeemable bonds are issued to finance the new project. Assume that the cost of equity remains at 10% each year. Ignore taxation. (4 Marks)

c. Write a report to the directors of ZY Plc that includes: i. A comparison and contrast of the rights issue and bond issue methods for raising finance, referencing calculations from parts (a) and (b) and any assumptions. (6 Marks)
ii. A discussion on the appropriateness of the following alternative methods of issuing equity finance in the specific context of ZY Plc: – A placing – An offer for sale – A public offer for subscription (6 Marks)

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  • 20 Marks

FM – Nov 2017 – L3 – Q3 – Financing Decisions and Capital Markets

Calculate theoretical ex-rights price, evaluate shareholder options, discuss EMH implications, and analyze market timing for Peter Plc’s equity financing.

Peter Plc. is a large, listed manufacturing company that is currently considering how best to raise new equity finance. One option is to undertake a public issue of new shares, a course of action recently approved by the shareholders. Alternatively, the company is considering a 1 for 4 rights issue at a 10% discount to the current market price of N5.00 per share.

The company has approached several investment banks regarding the potential new rights issue and public issue. During these discussions, one investment bank stated that the precise timing of a rights issue would be of no consequence. The bank is of the opinion that a public issue of new shares should not be undertaken at the present time. It recommended that if the company wishes to pursue a public issue, it should be deferred for a minimum of six months. The bank explained that, at present, the stock market is significantly undervaluing Peter Plc.’s shares. Consequently, the company would have to issue far more shares to raise the required amount of finance than it would in six months.

The Finance Director of Peter Plc. is uncertain about this and, at a recent board meeting where the matter was discussed, made the following statement:

“According to the Efficient Market Hypothesis, all share prices are correct at all times, with prices moving randomly when new information is publicly announced. The analysts at investment banks are unable to predict future share prices.”

Required:

  1. (a) Calculate the theoretical ex-rights price per share and the value of the rights per existing share, assuming the company chooses this option. (2 Marks)
  2. (b) Discuss the alternative courses of action open to the owner of 500 shares in Peter Plc. as regards the rights issue, in each case, determining the effect on the wealth of the investor. (4 Marks)
  3. (c) Discuss the factors that will influence the actual ex-rights price per share. (4 Marks)
  4. (d) Discuss the meaning and significance of the three forms of the Efficient Market Hypothesis and, with specific reference to these, discuss both the recommendation that the company waits for six months before undertaking a public issue and the Finance Director’s statement. (10 Marks)

(Total 20 Marks)

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  • 15 Marks

CR – Nov 2020 – L3 – Q4a – Business Valuation

Determine share value of Anidaso Ltd using multiple valuation methods including net assets, P/E ratio, dividend yield, and discounted cash flow.

Anidaso Ltd operates in the manufacturing industry in Ghana. The company is in the process of selling some of its shares to the general public to raise funds to expand its operations. Below are the financial statements of the company:

Statement of profit or loss for the year ended 30 September, 2019

GH¢’000
Revenue 122,900
Cost of sales (58,650)
Gross profit 64,250
Selling, general & administration expenses (43,570)
Profit before interest & taxes 20,680
Finance cost (1,680)
Profit before taxation 19,000
Taxation @ 20% (4,750)
Profit after tax 14,250

Statement of changes in equity (extracts) for the year ended 30 September, 2019

GH¢’000
Retained Earnings at October 1, 2018 47,970
Profit for the year 14,250
Dividend paid (6,200)
Retained Earnings at 30 September, 2019 56,020

Statement of Financial Position as at 30 September, 2019

GH¢’000 GH¢’000
Non-current assets
Development expenditure 13,050
Patents 8,200
Property, plant, and equipment 98,750 120,000
Current assets
Inventories 21,700
Trade receivables 12,501
Bank and cash 5,944 40,145
Current liabilities
Trade payables (15,400) 24,745
Net current assets 144,745
Non-current liabilities
10% Debenture loan stock (12,000) 132,745
Equity
Share capital 50,000
Revaluation Surplus 26,725
Retained Earnings 56,020 132,745

Additional relevant information:

  • The share capital of the company is composed of:
    • GH¢000
    • 20% redeemable preference shares 10,000
    • Ordinary shares (issued @GH¢0.20 each) 40,000
    • Total share capital: 50,000
  • A review of the development expenditure indicated that only 50% of it is worthwhile.
  • An independent valuer has placed values on some of the assets of Anidaso Ltd below:
    • Property, plant & equipment: GH¢111,000
    • Inventories: GH¢16,200
    • Trade receivables: GH¢10,000
    • Total value: GH¢137,200
  • Profit forecasts for the next five years of Anidaso Ltd are as follows:
    Year-end 30 September Profit before Tax (GH¢’000) Depreciation Charge (GH¢’000)
    2020 14,900 1,100
    2021 16,000 1,225
    2022 19,250 1,550
    2023 19,800 2,025
    2024 21,550 2,130
  • The patents in the statement of financial position represent a license to produce an improved variety of a product and is expected to generate a pre-tax profit of GH¢10,000 per year for the next five years.
  • Abiola Limited is a competitor company listed on the Ghana Stock Exchange, and data extracted from its recently published financial statements revealed the following details:
    • Market capitalization: GH¢1,000,000
    • Number of ordinary shares: 800,000
    • Earnings per share: GH¢0.20
    • Dividend payout ratio: 80%
  • The cost of capital of Anidaso Ltd is 10%.

Required:
Determine the value to be placed on each share of Anidaso Ltd using the following methods of valuation: i) Net assets
ii) Price-earnings ratio
iii) Dividend yield
iv) Discounted cash flow

 

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  • 5 Marks

AFM – May 2019 – L3 – Q3b – Valuation of acquisitions and mergers

Evaluate whether Ape should proceed with the merger by assessing the financial impact and synergy benefits.

Ape has 2,500 shares outstanding at GH¢10 per share. Bee has 1,250 shares outstanding at GH¢5 per share. Ape estimates that the value of synergistic benefit from acquiring Bee is GH¢500. Bee has indicated that it would accept a cash purchase offer of GH¢6.50 per share.

Required:
Identify whether Ape should proceed with the merger

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  • 15 Marks

CR – Nov 2021 – L3 – Q4a – Business valuations

Determine the value of shares of Aboto Ltd using multiple valuation methods including net assets, price-earnings ratio, dividend yield, and discounted cash flow

Aboto Ltd is a private company in the printing industry. It was established by the Aboto family some twenty years ago with Mrs. Aboto as the Managing Director. The business has grown in size over the years, and the directors are now considering listing the company on the Ghana Stock Exchange. The financial statements of the company for the year 2020 are given below:

Additional Information:

  1. The Share Capital of Aboto Ltd consists of ordinary share capital of no par value issued at GH¢100 per share.
  2. An independent valuer estimated the fair value of the Property, Plant & Equipment at GH¢500,000. Valuation charges of 2% have not been accrued for in the above accounts.
  3. The inventory includes obsolete items worth GH¢5,000 being held despite persistent advice by the auditors to have them written off.
  4. Receivables include an amount of GH¢12,000 resulting from the bankruptcy of a major customer. Aboto Ltd is not likely to realize any amount from this, but the directors have refused to make any provision.
  5. The patents represent a right to sell a special product. This product is expected to generate cash flows of GH¢2,000 per annum indefinitely.
  6. The discounted present value of future cash payments in respect of the debentures is GH¢20,000.
  7. Profits after tax of Aboto Ltd over the past four years were as follows:
    Year Profits (GH¢)
    2019 38,000
    2018 36,000
    2017 32,000
    2016 30,000
  8. A corporate plan prepared by the directors of Aboto Ltd in 2018 included the following positions:
  9. The price-earnings ratio and a dividend yield of quoted companies in the same industry Aboto Ltd operates are 8 and 4%, respectively.
  10. The net assets of Aboto Ltd as at 31 December 2019 were GH¢251,100.
  11. The cost of capital of Aboto Ltd is 20%.
  12. Investing in unlisted securities is about 20% more risky than investing in listed securities.

Required:

Determine the value to be placed on each share of Aboto Ltd using the following methods of valuation:

i) Net assets (4 marks)
ii) Price-earnings ratio (4 marks)
iii) Dividend yield (3 marks)
iv) Discounted cash flow (4 marks)

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  • 6 Marks

FM – NOV 2015 – L2 – Q5d – Portfolio theory and the capital asset pricing model (CAPM)

Calculate the expected return and the value of shares using the CAPM and the dividend discount model.

 I, me, and myself have shares in a company which paid a dividend of GH₵10 to its shareholders. The shares have a beta factor of 1.2. The risk-free rate of return and the market return are 15% and 20% respectively.

Required:
i. Calculate the return on the shares. (4 marks)
ii. Calculate the value of the shares. (2 marks)

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