FACULTY OF COMMERCE

GRADUATE SCHOOL OF BUSINESS

AUGUST 2023
ASSIGNMENT 1

Name : CHIKWADZE ABRAM

Student Number :

Program : MASTER OF APPLIED ACCOUNTANCY

Module : APPLIED CORPORATE FINANCE MANAGEMENT:

ZMAA 508

Lecturer
 Question 1

Cost Contributio Fixed Adverts Workin NCF Disc DCF

n Costs g Factor
@10%
Capital
Year 0 100,000 - - - - 1.000 (100.000)
Year 1 225,000 (30,000) 10,000 (25,000) 160,00 0.909 145,440
0
Year 2 225,000 (30,000) 15,000 180,00 0.826 146,680
0
Year 3 225,000 (30,000) 195,00 0.751 146,445
0
Year 4 225,000 (30,000) 195,00 0.683 133,185
0
Year 5 225,000 (30,000) 270,00 0.621 167,680
0
NPV +639,670

Decision: Accept the project as NPV is above the cost of the investment

Workings

1.Contribution p.a -Selling Price = 5.00

Variable Cost = 2.75
2.25x 100 000=225 000

2. Fixed Cost p.a =40,000

Less depreciation
100,000-50,000 = 10,000
5 30,000

3.Working Capital- Stocks = 15,000

Debtors = 20,000
35,000
Creditors = 10,000
25,000
Question 2

D=
D1(1+0,20)+D2=D1(1+0,20)+D3=D2(1+1.20)+D4=D3(1+1.20)+D5=D(1+20)=
D6=D5+1=1.20)

D1= 2 (1+0,20)=2,4
D2=2,4(1+0.20 = 2,88
D3=2,88(1+0,20)=3.46
D4=3,46(1+0,20)=4,15
D5=4,14(1+0,20)=4,98
D6=4,98(1+0,20)=5,98

Vo=2,4/(1+0,20)+2,88/(1+0,20)2+3,46/(1+0,20)3+4,15/(1+0,20)4+4,98/
(1+0,20)5+5,98/(1+0,20)6

5,98(1+10)=6,58
6,58(0,15-0,10=131,6
131,6/(1,10)7=67,53

2+2+2,002+2,001+2,001+2,001+2,002+67,53=73,53
The intrinsic value is =$73,53
Question 3

a) Strategies that may be employed by firm to increase its share price

Increasing market share is crucial and involves gaining a bigger share. That would indicate
that the growth of the firm is greater than average and it is outperforming its competitors.

Here are some areas a company can focus on to increase market share.

Innovation

Innovation that attracts customers can come in different forms. One is useful, new technology
that a company develops, introduces, and continues to improve before competitors gain a
foothold. Consumers excited about the technology buy it, use it, and can become repeat
customers. Innovative technology can build a company’s customer base with consumers new
to the industry as well as consumers who leave another company for it.

A few other ideas for innovating to gain market share can include product innovation,
production method improvements, and marketing strategies. The potential for high-value
innovation exists throughout a company.

Customer Loyalty

Building and reinforcing relationships with existing customers by cultivating their loyalty is a
smart strategy to gain market share. First of all, existing customer loyalty can help prevent
customers from leaving a company for others when new products come to market. What’s
more, a company can broaden its base with the word-of-mouth marketing so often provided
by satisfied, happy customers.

Take advantage of chances to engage with customers who desire a closer connection and to
deepen their positive experience. An added benefit is that this organic opportunity to
welcome new customers and increase market share often can come without specifically
related increases in a company’s marketing costs. Plus, loyal customers can sometimes share
ideas for innovations to the products they love.

Skilled Workforce

A company that focuses on attracting and keeping talented employees is focused on

increasing its market share. That’s because skilled employees can become dedicated
employees. That, in turn, can cut expenses related to hiring and training. Plus, a skilled
workforce that excels at its tasks can allow a company to maintain its focus on producing
exceptional products and sales. Attracting the best requires competitive salaries and a strong
selection of benefits, including options for flexible work schedules and relaxed office
settings.

Acquisitions

To win market share and dominate an industry, a company can consider buying its
competition. Such a move actually offers multiple strategies to increase market share in one
action. With an acquisition, a company takes a competitor out of the market and assumes its
market share. It captures its customer loyalty. Moreover, it can put products, services, and
other strategic opportunities already developed by its acquisition to work immediately. If a
company can’t buy another due to financial constraints, it can consider acquiring key
employees to improve its own workforce and for the customer loyalty connected to those
employees.

Advertising

Effective, frequent advertising offers a good opportunity to gain market share. Innovative
branding and marketing through advertising can garner the attention of consumers, build
connections with existing customers, and spur widespread desire for the products and
services a company offers. High-impact advertising in different forms can help buyers
understand and align with a company. No matter which advertising media is used, it’s wise to
maintain continuity across design, voice, and message to ensure a strong, positive, and lasting
impression. Companies should also make sure that their advertising actually targets the right
market segment for their products and services.

Price Reductions

Lowering prices is a solid strategy to help a company win market share. Lower, more
attractive prices can attract consumer attention and loyalty. That can increase the all-
important sales that drive market share higher. In addition to decreasing the actual price for
products, a company can consider promotions, coupons, bonus items, and other customer
benefits. For instance, incentives such as referral programs and free shipping can generate
extra interest and added sales

b)Semi-Strong Form

The semi-strong form assumes that only publicly-available information is incorporated into
prices, but privately-held information may not be.

On day 2 the price of shares for X is $2 and for Y is $3

On day 4 the price of shares for X is $3 and for Y is $3

On day 10 the price of shares for X is $3 and for Y is $3

Strong Form

The strong form assumes that all past and current information in a market, whether public or
private, is accounted for in prices.
On day 2 the price of shares for X is $3 and for Y is $3

On day 4 the price of shares for X is $3 and for Y is $3

On day 10 the price of shares for X is $3 and for Y is $3

Question 4

Stock market efficiency explains a situation where all available information is fully reflected
in stock market prices. Expressed differently, all the positive and negative effects of various
information would have been factored in the synthesis of the resultant price of a particular
stock. This means that stock prices in an efficient market generally represent the intrinsic or
true values of the stocks. Therefore, scarce savings are automatically allocated to productive
investments and this benefits both investors and the economy

The Efficient Market Hypothesis (EMH) assumes that all available information fully
reflected in stock prices at any point of time is the best estimate of the real value of the stocks
(Malkiel and Fama 1970). Efficient Market Hypothesis depends on the following three
conditions: (1) no transaction cost, (2) public and free information, and (3) current stock
prices reflect all available information.

The Zimbabwe Stock Exchange Limited (ZSE), a member of the African Securities
Exchange Association (ASEA), the Committee of SADC Stock Exchanges (CoSSE) and the
Sustainable Stock Exchanges Initiative (SSE), is a securities exchange regulated in terms of
the Securities and Exchange Act (Chapter 24:25) to provide for the listing and trading of
securities in Zimbabwe (ZSE 2017 Annual Report). The Exchange also joined the United
Nations' Sustainable Stock Exchange Initiative (“UN SSEI”) in December 2015 in
recognition of the contributory role of sustainable capital markets towards economic growth
(ZSE 2017 Annual Report). The ZSE, which is the second largest bourse in Sub-Saharan
Africa after the Johannesburg Stock Exchange, plays an indispensable role in mobilising long
term capital and to provide an efficient and reliable securities market. Then called Salisbury
Stock Exchange, the bourse opened its doors in 1896 (ZSE 2017 Annual Report) and
currently has a total of sixty listed and active companies with a total market capitalisation of
more than 12 billion united states dollars.

The earliest bourse in Zimbabwe commenced in Bulawayo in 1896 (ZSE, 2018). However, it
operated only for six years. Other bourses were also opened in Gweru and Mutare. Mutare
stock exchange (also founded in 1896) thrived on the success of the local mining industry, by
activity declined and the exchange closed in 1924 mainly due to unsustainable mining
deposits. A new stock exchange was founded in Bulawayo after the World War II and it
started trading in 1946. In December 1951, a second floor was opened in the capital Salisbury
(now called Harare) and trading between the new and old centres was through telephone.
Operations at the centres continued until a decision was made that legislation be enacted to
govern the rights and obligations of both members of the exchange and the general investing
public.

Owing to the severe macroeconomic environment characterises by unprecedented levels of

hyper-inflation as well as unemployment in Zimbabwe, the ZSE temporarily stopped trading
in November 2008 and reopened on 19th February 2009. The Zimbabwe economy dollarised
in 2009 and the ZSE similarly adopted the US Dollar as its primary trading currency, which
currency is under use up to now. Indices were rebased to 100 for both the industrial and
mining indices.
The ZSE has generally been performing well, with its market capitalisation not anywhere
below US$3 billion. The year 2013 was exceptional, with the bourse’ market capitalisation at
more than US$5 billion although this gradually plummeted back to around US$3 billion in
2015 before gaining to around US$4 billion in 2016. Figure 1 below shows the total annual
market capitalisation of the ZSE from 2009 to 2016.
In support of the adverse trend of market capitalisation of the ZSE, the industrial and mining
indices equally reveal downward trends from 2009 to 2016 although these seem to show a
possible positive trend reversal after 2016 as depicted in Figure 2 below. In 2009 and 2010,
the industrial index was below the mining index, but this has been reversed from 2011 up to
2016. The mining industry thus recorded a worse downtrend as compared to the industrial
index. In other words, the industrial index actually performed better than the mining index for
the entire period under review. Although the industrial index rose sharply from 2012 to 2013,
the combined movement of both indices is a clear indication of below the overall average
economic performance of the nation.
Despite having risen to almost US$486 million in 2013, ZSE annual turnover fell
significantly from more than US$400 million in 2009 to less than US$200 million in 2016. A
considerable uptrend in turnover occurred since dollarisation in 2009, but the trend moved
southwards after 2013.
Many players on the ZSE talk of ‘beating the market’, thereby profiting from arbitraging
activities. Intuitively, the bourse can be said to be inefficient because of this behaviour. When
the stock market is efficient in its weak form (meaning it follows a random walk), no such
behaviour can be lucrative.
Technical analysts, also known as chartists, have an opportunity to profit by predicting future
price trends when the bourse is not efficient. Similarly, these market participants lose such an
opportunity when the bourse follows a random walk.
Normality Tests
The basic requirement for any market to be random or to follow the weak form of efficient
market hypothesis is that the returns should follow a normal distribution (Adigwe, Ugbomhe
and Alajekwu, 2017). Descriptive statistics are therefore used to test for normality of returns
on the ZSE. Descriptive statistic measures uses the mean, standard deviation and the Jarque-
Bera Statistic. The mean (one of the measures of central tendency) measures an average
observation whereas the standard deviation is a measure of dispersion or variation. The most
important descriptive statistic in this case, the Jarque-Bera Statistic test the null hypothesis
that “the ZSE follows a normal distribution” against the alternative hypothesis that the same
bourse “does not follow a normal distribution”. Decision Rule for the JB statistic, say at 5%
level of significance, would be to reject the null hypothesis of normality if probability value
is less than 0.05, and the opposite holds.
Unit Root Tests
The random walk is an example of a non-stationary series. A random walk can therefore be
determined through testing for stationarity of a data series. If a series is non-stationary, then it
follows a random walk and vice-versa. The formal methodology for testing stationarity of
some data series is the unit root test. A non-stationary series has unit root(s) and the opposite
is true.
Although there are many other specific tests that can be used to test for unit root, such as the
Dickey-Fuller GLS (ERS), Phillips-Perron, Kwiatkowski-Phillips-Schmidt-Shin, Elliott-
Rothenberg-Stock Point-Optimal and the Ng-Perron test, this study only utilised the ADF
test.
Data used for unit root tests was converted to market returns as shown in the equation below:
Rm= (Mt-Mt-1)/Mt-1
Where Rm= average return on the entire stock market
Mt= current month stock market index
Mt= previous month stock market index
The Efficient Market Hypothesis
The main principle behind the EMH is that the price of a stock reflects all the information
available to the market participants concerning the return and risk of that security. The
current price represents the present value of all future dividends expected from holding the
stock. If all the available information is factored into the market price, the market price will
reflect the share’s worth or, rather, estimate its value.
All the information available to the market about future cash flows expected from holding a
particular share is factored into the share’s price through trading. Trading brings together
heterogeneous market participants, each seeking to maximise their utility. As each trader
participates in the market the information he or she has about a share is incorporated into the
market price of the share; hence trading transmits the information from traders into the prices,
making the price mechanism the aggregator of information currently available (Grossman,
1976; Lo, 1997).
To illustrate how the price mechanism transmits and aggregates information, consider a
market where the traders have diverse information. In period t, (the current period) each
trader makes a prediction as to Pt+1, (the share price in period t+1) and then decides how
much stock to hold. This will determine the current price Pt, which will depend on the
information received by all traders. Now assume that the ith trader observes Yi (his/ her
estimate of the future price), where
Yi = Pt+1 + ei
ei is a “noise” term which prevents any trader from knowing the true value of Pt+1 . If there
are n traders, the current equilibrium price (Pt) would be a function of Y1, Y2 ,..., Yn (each
trader’s observed Pt+1 ), that is
Pt = Pt (Y1, Y2,….,Yn)
Where n>1
A competitive pricing system is expected to efficiently aggregate all the traders’ information
in such a way that the equilibrium price summarises all the information available to
individual traders, thus Pt (Y1, Y2,….,Yn) becomes an efficient statistic for the unknown
Pt+1 . Although Pt+1 is unknown, traders believe that it is distributed independently of the
ei s and that
Pt+1 N (Pt+1, 𝛿2)
i.e. the true value of Pt+1 is normally distributed around the market determined Pt+1 , with
variance s 2 . The price system determines the price until a particular Pt+1 is determined, and
the ith trader is able to learn the true value of Pt+1 (Grossman, 1976: 573).
If any one trader realises that a particular piece of information is apparently not factored in
the price, he has an economic incentive to uncover it and trade on it. As more and more
traders realise that there is an incentive to invest in information, the informational content of
the prices increase until the market is restored to informational efficiency. Therefore market
efficiency, as postulated, is brought about by arbitrage forces, which are constantly at work in
an open market. Individuals in the economy may behave irrationally, but arbitrage forces are
expected to keep the price in line with the security’s worth (Lucas, 1978).
Evidence Against Market Efficiency
Empirical evidence against market efficiency can be said to be mounting. Some researchers
who had hypothesised that markets are efficient could not find strong empirical evidence to
support the hypothesis especially in developing and emerging markets. As is common with
research into economics, numerous researchers have raised concerns on potential sampling
errors he formative nature of behavioural theories and other econometric concerns, while
maintaining that the hypothesis is robust (Damodaran, 1996 and Kothari, 2001).
Markets do, in essence, aggregate information across heterogeneously informed traders more
efficiently than a central planner if sufficient incentives exist to ensure that this aggregation
process operates efficiently. The reliability of the price discovery system depends on the
continued existence of exploitable (miss-pricing) opportunities to ensure that arbitrage
continues to function; hence a free and competitive market is (expected to be of necessity)
inefficient to some degree.
The massive arbitrage activities present in today’s securities markets attest powerfully to the
continued existence of market imperfections on which arbitrageurs ‘feed’ (Hayek, 1945; Lee,
2001).If arbitrageurs make no profit from their ‘costly’ activity, then the assumption that
markets are always in equilibrium is inconsistent with the assumption that markets are always
perfectly arbitraged. Grossman et al. (1980: 393), therefore propose a model in which there is
an“equilibrium degree of disequilibria: prices reflect information of informed traders
(arbitrageurs),but only partially” so that those who invest in collecting and analysing
information are compensated. Share prices convey information, making the information
obtained by the informed traders publicly available, but the market does this imperfectly, for
if it were to do it perfectly, equilibrium would not exist.
Grossman’s model is an extension the Noise Rational Exceptions Model (Grossman 1978).
He assumes that, on one hand, there are informed traders, who learn the underlying
probability distribution that generates future expected prices and take positions based on this
information. On the other hand, there are uninformed traders who do not invest in collecting
information, but who know that the current price reflects the information of the informed
traders.
Conclusion
In an efficient market successive price changes are independent and therefore uncorrelated.
The correlation tests performed shows that there is little evidence of dependence in
successive returns of shares listed on the ZSE. Where dependence exists it is limited; the
correlation coefficients are just slightly greater than would be expected in a purely random
series. Hence it can be concluded that the ZSE is an efficient market.

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