create the firm’s proforma statement of financial position for the next fiscal year. Sales are projected to grow at 10% to the level of sh 330,000,000. Current assets, fixed assets, short term debt, long term debt are projected at 125%, 150%, 40% and 45% of the current total sales respectively. Brookside Ltd pays out 40% of the net income. The value of common stock is constant at Shs.50 million.
The net profit margin on sales is 12% based on CFO’s forecast, how much external funds does Brookside Dairies Ltd require? [7 marks]
(b) (i) Derive the equation of the capital market line. [3 marks]
(ii) Use the equation in b(i) above to determine the risk of an efficient portfolio whose expected return is 16% given that the risk free return is 10% the expected return on market index is 18% and the standard deviation of the market index is 5%. [5 marks]
(c) A financial forecaster has gathered the following data about the relationship between returns on stock S and the market (M) for the last six years. The data is expected to obey the relationship R_s = ?+ßR_m + e and e is expected to be zero over time due to randomness of unsystematic risk.
The percentage returns for the past six years are shown in the table below:
Year 1 2 3 4 5 6
Return (%)
S 8 9 20 -10 5 12
M 15 7 16 -13 4 7
Required:
(i) Estimate the values of ? and ß using regression analysis. [4 marks]
(ii) How much variation in the returns of asset S is explained by the market? [2 marks]
(iii) Calculate the unsystematic risk of stock S. [1 mark]
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