A.Bombay Bhd is a high growth company.Its current dividend of RM1.80 per share is expected to grow at a rapid rate of 15% a year for the next 2 years.Thereafter, dividend growth will slow down to 5% a year for the indefinite future.If investors require a rate of return of 12%, calculate the stock's intrinsic value.

(6 marks)

B.Marsala Bhd's stock sells at RM4.50 per share on Bursa Malaysia, and its latest 12 month earnings are RM0.30 per share.The firm's dividend payout ratio is 40%.

i.What is the firm's current P/E ratio?

(2 marks)

ii.If investors expect earnings to grow at 12% a year, what is the projected price of the stock next year if the P/E ratio remains unchanged?(use P/E Approach)

(3 marks)

iii.Given the same payout ratio, dividend growth rate of 12%, and required rate of return of 16%, would the stock be a good buy at the price calculated in (ii) above? Why?

(4 marks)

QUESTION 2

A.MCK Bhd paid a dividend of RM2 per share last year. The growth rate in dividend is expected to be 4% for the first year, 5% for the second year, and then 6% for the third year. The growth rate is expected to be constant at 7% per year thereafter. The required rate of return is 10%.

i.Calculate the maximum share price you should be willing to pay for the stock?

(8 marks)

ii.If your remisier recommends that you buy this share at the current market price of RM65, should you agree?

(1 mark)

B.The MFC common stock is currently selling at RM10 per share. Dividend is expected to grow at 6% annually. MFC is expected to pay dividend of RM1.50 per share at the end of the year. What is the rate of return on this investment?

(3 marks)

C.Mubin plans to buy stock of AM Bhd today and to hold it for 2 years. He expects the stock to pay dividend of RM9.25 at the end of Year 2, after which he plans to sell the stock for RM125. If the expected rate of return is 16%, what is the maximum price that Mubin should be willing to pay for this stock?