Question
a. Damai Bhds expected earnings after taxes is RM300 million. The current market price of its common stock is RM5.00 per share. At present the
a. Damai Bhds expected earnings after taxes is RM300 million. The current market price of its common stock is RM5.00 per share. At present the company has 500 million shares outstanding and a PE ratio of 10.
i. Calculate the intrinsic value of Damai Bhds common stock. (3 marks)
ii. Would you buy the share at its current price? Why? (2 marks)
b. Adnin Bhd currently pays a dividend of RM0.50 per share. The dividends are expected to grow at an annual rate of 5% per annum indefinitely from next year. Its common stock is currently selling at RM6.00. If you want to earn a 15% rate of return, calculate the maximum price you should pay for the common stock. (3 marks)
c. Bestari Bhds common stock is only expected to pay dividends of RM0.60 at the end of the year. The dividend payout ratio and the return on equity (ROE) are expected to be 40% and 20% respectively. If the required rate of return is 14%, calculate the value of Bestari Bhds common stock today. (7 marks)
d. The Fix Mines Company just paid dividends of RM2.00 per share. However, the future does not look bright because of the global economic downturn. The mine is virtually depleted, and earnings are expected to decline by 10% per year for the foreseeable future. However, the firm will continue its policy of paying out 40% of earnings as dividends for the next four (4) years. In the fifth year, the firm will liquidate all assets, and then use the proceeds to buy back all outstanding amounts of shares at RM9.50 per share. The required rate of return on the firms stock is 15%. Calculate the stock price today.
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