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QUESTION 2: STOCK CHARACTERISTICS AND VALUATION a) Compute the value of a share of common...

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Finance

QUESTION 2: STOCK CHARACTERISTICS AND VALUATION
a) Compute the value of a share of common stock of Lexus HotelBerhad whose most recent dividend was RM2.50 and is expected togrow at 3.50 percent per year for the next 5 years, 5 percent peryear for the next 3 years, after which the dividend growth ratewill increase to 6 percent per year indefinitely. Assume 10.00percent required rate of return.

b) Glass Art Manufacturing Berhad has a beta of 1.50, the risk-freerate of interest is currently 12 percent, and the required returnon the market portfolio is 18.00 percent. The company plans to paya dividend of RM1.96 per share in the coming year and anticipatesthat its future dividends will increase at an annual rateconsistent with that experienced over the 2016-2018 period.

Year

Dividend(RM)

2016

1.68

2017

1.77

2018

1.86


Estimate the value of Glass Art Manufacturing's stock.

c) Tina's Medical Equipment Berhad paid RM1.15 common stockdividend last year. The company's policy is to allow its dividendto grow at 5.50 percent per year indefinitely. Estimate the valueof the stock if the required rate of return is 8.50 percent.

Answer & Explanation Solved by verified expert
4.4 Ratings (734 Votes)

a)

Req Rate of Return 10.0%
Growth in dividend YOY 3.50% 3.50% 3.50% 3.50% 3.50% 5.00% 5.00% 5.00% 6.00%
Year 0 1 2 3 4 5 6 7 8 9
Dividend                               2.50           2.59           2.68           2.77           2.87           2.97           3.12           3.27           3.44
        91.09
Total Dividend           2.59           2.68           2.77           2.87           2.97           3.12           3.27         94.52
PV of Dividend (Discounted by Rate of return)           2.35           2.21           2.08           1.96           1.84           1.76           1.68         44.10
Value of stock in RM                             57.99

b)  

Beta 1.5
Rf 0.12
Req Rate of return 0.18
Rate of return CAPM Model 21.00% r= Rf + B * (Rm- Rf)
5.36% 5.08% 5.38% 5.38%
Year 0 1 2
          1.68                              1.77     1.86           1.96
DDM         13.22
PV of dividend         10.93
Value of stock in RM 10.93

C)  

Req. Rate of Return 8.50%
5.30%
Year 0 1
Dividend 1.15
Value of Stock in RM By Using DDM         37.84
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