Question
) Borneo Oil Corporation (BORNOIL) paid its stockholders an annual dividend of $3 per share. A major brokerage firm recently put out a report on
) Borneo Oil Corporation (BORNOIL) paid its stockholders an annual dividend of $3 per share. A major brokerage firm recently put out a report on BORNOIL predicting that the companys annual dividends would grow at the rate of 10 percent per year for each of the next three years, 12 percent for the next two years and then level off and grow at 6 percent thereafter. The required rate of return is 12 percent. i. Find the maximum price you should be willing to pay for this stock. (9 marks) ii. Redo the BORNOIL problem in part i, and assume that after year 5, dividends stop growing altogether (for year 6 and onward, g = 0). Use all the other information given to find the stocks intrinsic value. If the market price of the stock is $36.78, isnt worth it to buy the stock? Justify. (8 marks)
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