Financial Markets and Institutions Assignment

You are the chief financial officer (CFO) of Rich Man Company Inc. The company has performed well over the past year. After setting aside money for dividends for the shareholders you have 10,000,000 Riyals in cash. You need to decide what to do with all the money you made. A meeting with the heads of the finance departments is called and you asked them for their recommendations. You tell them that although the current year has been good, you dont know how the next year is going to be. You also explain that according to the companys current expansion plans, you will need 1,000,000 Riyals every year for the next ten years. When you asked for their opinions, everything goes crazy and as expected, they cant agree about anything. From their presentations, you understand that the current market conditions are as follows:

Stock market:

The stock market has been doing well. The average growth in stock prices is at 10% year over year. The companys stock (RICH) is currently priced at 150 SAR and the dividends per share will be at 3 SAR by the next quarter. Your analysts expect that the average required rate of return for investors in the market is at 8%. The current dividend growth rate for your stock has been 5%.

Part 1 Analysis of the Stock price

Apply what we learned in the course to assess whether the companys stock price is overvalued, undervalued or appropriate. If you find that it is over- or undervalued, 2)what would you need to change for the stock to be appropriately priced?

3- Here is a summary of the presentations:

The first head of department, Mr. Saeed, has been with the company for a long time. He thinks that the companys stock is overvalued and is proposing to hold the excess money in a savings account to accrue interest. He believes that this would be the safest investment. You proposed that putting the money in the money market would be a better option but he said that he has never done that and doesnt think its a good idea.

The second head of department, Ms. Nourah, is not as experienced as Mr. Saeed but is excited about the future growth of the company. She disagrees with him and thinks that the stock is undervalued. She is proposing to issue greater dividends to investors. She tells you that, by sharing the profits with the shareholders, the company is doing what is best for them. She also thinks that the stock price will increase and investors will have more confidence in the company. If the company needs to raise money in the future, it can issue stock at a later date..

The discussion becomes so heated that you need to intervene. Based on the information provided above, detail the investment strategy that you will approve with appropriate justification for your decision. Keep in mind that you can pick more than one option.

Note: You will need to provide an analysis of all the options provided above including your response to each of the department heads with detailed calculations and rationalizations for your answer. Please refer to the Answering the Assignment Guideline document.