ABJ Sdn Bhd is a manufacturer of technological products. This company focusing on heavy engineering technology helps professionals perform tasks such as building bridges or digging

tunnels. Total revenues for ABJ Sdn Bhd in the last fiscal year were in excess of RM 8.5 billion. The financing structure of ABJ Sdn Bhd are as follow:

Preferred Stock

The preferred stock is a RM 1.50 cumulative preferred with a stated value of RM25.40, but it is currently selling for RM20. More than 3 million shares were issued in March 2020 in connection with the merger of RS Inc Company into a subsidiary of SLP. The preferred stock has no voting rights unless the company is in arrears on six or more quarterly dividends and then each shareholder is entitled to one-quarter vote per share. In the event of liquidation each share is entitled to RM 25.40 plus accrued dividends.

Common stock

Returns from common stock come from the cash dividend payment and or changes in the price of the stock. Investors receiving dividends can expect them to grow over time, but some stocks

do not pay dividends, especially during their early growth years. As firms mature, they typically start paying dividends and then management is very reluctant to reduce the dividend. For the

firms that do not pay dividends, the normal assumption is that the earnings are being retained by the firm to promote growth; thus, the stock price should grow at a higher rate than firms that

have high payout ratios.

Two major factors that affect the price of stock are changes in the required rate of return, caused primarily by changes in the risk, and changes in the growth rate of earnings, which in turn create changes in the growth rate of dividends.

The common stock of ABJ Sdn Bhd currently has over 87 million shares of RM2.35 par value stock outstanding. A share of common stock presently sells for RM34.50 and pays a quarterly dividend of RM0.23. A consensus estimate (ZNCs and IBES) indicates that earnings and dividends are expected to grow at annual rate of 8.7 percent for the next five years. The common shares have no preemptive rights. Stockholders of SLP have the opportunity to buy additional shares at the market price (with no commission) each month. Shareholders who participate in this plan are limited to a total of RM 1,200 per month that they can use to purchase additional shares.

Questions:

a) In the event of liquidation, SLP preferred stockholders are entitled to RM 25.40 plus accrued dividends. Does this mean that preferred stockholders will receive that amount?

b) What is the dividend yield and expected capital gain yield for SLP common stock?

c) Given that SLP is selling for RM 34.50, what is its required rate of return? (Use the constant growth valuation model).

d) Using the constant growth valuation model, find the present value of SLP common stock. Would you buy or sell?