1. TAIREN

Tairen Steel Company wishes to determine the value of Acme Foundry. Tairen wishes to use the CAPM to determine the appropriate discount rate to use as an input to the constant growth valuation model. The estimated beta for Acme Foundry is 1.25. The risk free is currently 9 percent and the market return is 13 percent. Acme historical dividend per share for the past six years is:

2001	$ 2.45
2002	$ 2.75
2003	$ 2.9
2004	$ 3.15
2005	$ 3.28
2006	$ 3.44

a. Given that Acme is expected to pay a dividend of $3.68 per share next year, determine the maximum cash price Tairen should pay for each share of Acme. (5 m)

b. What are the implications if John Kim paid more than the above computed price for the firms shares? Why would John paid a higher price for Acme Foundrys share? (15 m)

2. NEW TOWN COFFEE

New Town Coffee is a medium sized firm that is listed on the Bursa Malaysia. The profits of the company are RM 3.8 million per annum. The book value of the net assets is RM 15 million while their net market value is RM 20 million. The proposed annual gross dividend is 20 sen for each of the 10 million shares of par value RM 0.50 sen. The company beta is 1.2. The risk-free rate is 4% and the price to earnings ratio on the market portfolio is 8 times. The growth rate of dividend is 5%.

Required:

1. Compute the P/E ratio of the company.
2. Compute the required return on equity using the CAPM.
3. To suggest 5 different basis for valuing the shares of this company based on the above information.
4. To explain which valuation method is the most appropriate.