(i) When estimating the price of a share of common stock a risk-adjusted discount rate is usually applied. Explain why it is necessary to ensure that the discount rate is risk adjusted.

(b) Following the uncertainty in UK economy, primarily as a result of the UK governments failure to negotiate a trade deal with the European Union, company X which operates in the pharmaceutical sector has experienced increasing price pressure. Despite this, company X expects to see an above normal dividend growth rate of 20 per cent, but only for the last five years. Stock market analyst at company G expects this above normal growth rate to continue for a further 5 years before levelling off at a normal rate of 6 per cent. company X last dividend was 0.50 per share, and as a result of the less stable UK economic environment, analysts expect investors to demand a risk premium of 6 percent. It is assumed that the risk-free rate is 4 per cent.

(i) Determine the current value of company X's stock on the basis that its required rate of return is 15 per cent and (ii) given the risk premium, will investors buy the stock?

(c) company A has paid a dividend since 2015. The most recent dividend it paid was 1.21. Despite the febrile international environment, dividends have been growing at a constant annual rate of 4 per cent and is expected to continue. The appropriate risk-adjusted discount rate is expected to remain at 9.25 per cent for the foreseeable future.

1. (i) Estimate the price of the company A stock

2. (ii) Estimate the price of company A stock if the 1.21 dividend is repaid semi-annually.

(d) company M has 800,000,000 under management and is considering purchasing 5000,000 shares in company F, a French company. Dividends from the shares will be paid annually. The next dividend is due in 6 months and is expected to be 6 pence per share. The second, third and fourth dividends are expected to be 25 per cent greater than previous dividends, and thereafter dividends are expected to grow at a constant rate of 5 per cent per annum in perpetuity. Calculate the present value of the dividends if company M's required rate of return is 14 per cent per annum