A) CVX Tech is known for creating innovative technology solutions for electric vehicle manufactures. Three years ago, the company has raised $80 million through an IPO. However, it has not earned any profit so far. Analysts are expecting that CVX will earn a profit of 80 cents per share next year. The forecasted earnings per share for following two years are $1.2 and $1.5. Then onwards the firms dividends are expected to grow at a constant rate. The firms ROE is expected to be 20% and the firm plans to to distribute about 40% of its earnings as dividends in future. CVXs cost of equity is estimated to be 15% pa.

i) Based on the information estimate CVXs intrinsic value using a multistage dividend growth model. Show your calculations.

ii) Do you think a dividend discount model is appropriate for valuation of a firm like CVX? Briefly discuss your answer with explanation.

B) Security analyst Jo identified three potential securities A, B and C for investment. The market portfolio M provides 12% pa return and risk-free return (rf) is 4% pa. In the following chart Jo draws the securities market line and identifies the relative positions of these three securities. Using the data given on the chart below identify the security which will give you maximum abnormal return (alpha). Explain your answer with reasons.