Ican 2025 Strategic Financial Management Question 3

Zeco Plc (ZP) is a listed company in the residenital building construciton industry. Over the past ifve years results have been disappoinitng and consequently the share price has fallen from a high of 3.50 per share ifve years ago to only 1.05 per share today. This deterioraiton in performance and share price have been accompanied by an increase in ifnancial gearing to a high level. Zeco Plc capital structure is as follows: Equity: Share capital ( 0.50 per share nominal value) 40 Retained earnings 35 Long – term liabiliites: 6.5% irredeemable loan notes ( 100 per loan note nominal value) 250 7% bank loan 20 Zeco Plc. loan notes are quoted at 65 per loan note and both the loan notes and the bank loan are secured. Zeco Plc equity beta is 2.3. New venture To improve performance, Zeco Plc. is considering the construciton of commercial properites such as oiffce blocks and industrial complexes. This is a new acitvity for Zeco Plc and it is expected that the risks involved will be different from its current acitvity. The Finance Director has proposed that a project-speciifc discount rate should be used to appraise the new venture, but the Commercial Director does not believe this is necessary. Delac Commercial Properites Plc. (DCP) undertakes commercial construciton projects similar to those being considered by Zeco Plc. DCP has an equity beta of 1.25. DCP has N100m of ordinary shares in issue, currently quoted at ₦2.60 per ₦1 nominal value ordinary share. The company also has ₦110m of loan notes in issue, currently quoted at ₦96 per ₦100 nominal value. Both companies pay tax at 20%, the risk-free rate is 4% and the expected return on the market porftolio is 10%.