Joniper Berhad is a firm operating in a mature industry. The firm is expected to maintain a constant dividend payout ratio and a constant growth rate of earnings for the foreseeable future. The firms earnings for the current year is RM5 per share. The dividend payout ratio has been constant at 40% in the recent years. Joniper Berhads return on equity (ROE) is expected to remain at 10% in the future. Required return on similar risk investment is at 12%.

Required:

i. Determine whether Jementah Berhads stock is correctly priced if it is selling at RM25 per share. (5m)

ii. Explain the effect of increasing the investors required rate of return on the value of the firms common stock. (3m)