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Part 1: Portfolio Theory

On the Excel sheet, you have been provided with the price series of the Semdex, Ciel, PhoenixBev, MCB and CIM.

The Semdex index level is to be considered as a proxy for market. To annualise the daily returns, assume 250 trading days per annum. Similarly, to compute the annual standard deviation from the daily standard deviation, assume 250 trading days.

• You are required to compute the expected annual return and the annualised standard deviation of the 5 stocks and the Semdex.

Note that you are expected to research the techniques around return and standard deviation computation to answer part a). The findings of the research completed should not be mentioned in the pdf submission.

• Using the CORREL function on Excel, compute the correlation matrix between the 4 stocks, with the Semdex included.
• Using the standard deviation calculated in part a), compute the beta for the 4 stocks assuming the Semdex as the market portfolio
• Based on the above findings, you have decided to invest in Cim and Ciel for your personal investment Using the Solver add-in on Excel, calculate the optimal weight between the 2 stocks to maximise the return-to-risk ratio of your portfolio.

Part 2: Cost of Capital 

Using the Beta computed for Ciel from Part 1, you are required to compute the following for the conglomerate. You are expected to provide the source and justification for the inputs chosen for the below computations.

• Cost of
• Cost of debt

Useful references:

SEM Debt Board: https://www.stockexchangeofmauritius.com/products-market-data/debt-securities Ciel Annual Report (2024): https://www.cielgroup.com/en/investors/annual-report

• Weighted average cost of capital (WACC)

For the WACC computation, you can assume that the book value of debt equates to the market value of debt of Ciel.

Part 3: Investment Appraisal – Lottotech Acquisition

Ciel is considering the acquisition of Lottotech from Gamma Civic (major shareholders) and from minority shareholders on the Stock Exchange of Mauritius.

To that end, the current year financial statement (year ending 31 December 2024) is used as starting point, with the financial projections completed until 31 December 2032, as included in the Excel sheet provided.

The assumption for the investment appraisal is that Lottotech’s gaming licenses from the Gambling Regulatory Authority (GRA) will not be renewed once they expire in 2032.

The indicative purchase value of Lottotech has been agreed between Ciel and shareholders of Lottotech at Rs. 2,440 million, subject to the detailed financial analysis being now carried out.

REQUIRED:

1. Using the financial statements provided, you are required to compute the Free Cashflow to the Firm (FCFF) over the forecast period.
2. Compute the following:

• Payback Period, and
• Internal Rate of Return (IRR)

1. Given the IRR computed above, and using the WACC of Ciel computed in Part 2 of the assignment, should the acquisition be accepted? What are the investment risks tied if Ciel uses its own WACC as the hurdle rate to assess the acquisition?
2. Following further internal discussions with external corporate finance advisors, the WACC of Lottotech has been estimated to be at 0% given the specific risks to the firm. Should the acquisition proceed with the WACC of 15%.
3. Using the WACC of 15%, calculate the Net Present Value of the
4. Compare and contrast between the above acquisition appraisal methodologies, stating which one is the most appropriate to use for the Lottotech firm