Kempinski Ltd$.$ has just paid a cash dividend of $$2$ per share. The market forecasts that the dividend payments of the company will grow at $20\%$ per year for the next three years, $15\%$ for the following year and then settle down to $10\%$ per year afterwards.

Given the risk$-$free rate is $4\%,$ the market risk premium is $10\%$ and Kempinski$$s stock has a beta of $1\mathrm{.}2.$

$($a$)$ What is the required return for Kempinski based on CAPM? $(2$ marks$)$

$($b$)$ Calculate the $($intrinsic$)$ value of Kempinski stock at time $0.(6$ marks$)$

$($c$)$ Given the expected dividend growth path $($as forecasted above$),$ is Kempinski$$s share over$-$

valued or under$-$valued if it is selling at $$100$ three years from now? What is the trading

State of the Economy

Probability

Expected rate of return of Stock Gold Standard under various states of the economy

signal it implies?

$(4$ marks$)$

$3$