Case Study 1

You are currently evaluating two stocks, Stock A and Stock B. You know that the current treasury bills discount rate is 5.5 percent, and the average market return from Bursa Malaysia is 12.5 percent. Market risks for a similar category of stock will be 1.2. You are required to:

(a)Calculate the expected return for investing in the company's common stock by using CAPM.

(2 marks)

(b)Based on the answer in (a), if Stock A paid a dividend of RM1.50 per share while stock B paid RM0.80 last year, both stocks' annual dividend growth rate is 8.5 percent. Identify how much you are willing to pay for both stocks.

(4 marks)

(c)If the firm's risk as perceived by market participants suddenly increases, causing the required return to increase to 20 percent, what will be the value for both stocks?(4 marks)

(d)DiscussFIVE (5)important points for investors before investing in common stock.

(10marks)