Bonnie is concerned she may not have enough money to expand the company given how quickly the industry is doing. She is thinking of asking external parties to contribute capital into a business. You advise her to consider issuing stocks a common way of raising capital when a company gets listed. Using available information from a sample of firms which can be considered comparable to Bonnies business in the future. You estimate, explain and advise her on the following issues.

1: A comparable firm is about to pay dividend of $2 by the end of the year. This information is available to the market. Your forecast indicates that dividend of this company can increase by 4% in the next two years. After that, dividend will increase by 5% and 6% in the year 3 and 4 before revert to 2% per year indefinitely. Given the level of risk of this stock, you consider that it is appropriate to accept a rate of return of 4% per year. What should be the price of this stock?If this stock is currently trading for $100 in the market, how would you advise Bonnie?

2:

Bonnie is now getting very excited about all important concepts from managerial finance for a business leader like her. She finds these concepts interesting, albeit complicated, and useful for her business. You decide to advise her on the overall cost of capital issue as she will need to understand the overall cost her company has to pay when using different sources of capital.

The stock above (as discussed on question 3-part a) has beta of 0.60. The Australian market risk premium is 7 per cent. Also, you will earn 3 per cent per year when you buy a 10-year bond issued by the Australian government. What is the cost of equity? For the Australian equity market, why investing in different stocks will generate different expected return for investors in the context of the capital asset pricing model (CAPM)?