Long Ouestion 1 (do this question after you have learnt Topic 6 - Risk and Return) (Comprehensive Question includes CAPM and Stock Valuation) Hans and Halak have just got married and are currently working on their early retirement plan. Specifically, the couple would like to invest $600,000 into common shares of Company A and $600,000 into preferred shares of Company B. The management of Company A, a start-up, has indicated that it will be paying no dividends for the next two years (i.e. years 1 and 2) but will pay a dividend of $5 per share in year 3 . The management has also expressed its intention to increase the dividend payments by 20% per year for the following two years (i.e. years 4 to 5), and 10% per year thereafter. Market estimates that Company A has a beta of 1.8. Company B, a leading utilities company, is paying an annual dividend of $8 per share on its preferred stock. With its stable revenue source, the market risk of Company B is estimated to be half of that of the general market. Assume that Company B's stock is fairly priced. The long-term risk-free interest rate is 3% and the market risk premium is 7.5%. All interest and returns are compounded annually. (a) According to CAPM (Topic 6 - Risk and Return), what is the required rate of return on Company A's shares? [Note: If not familiar with the formula of the CAPM from your previous studies elsewhere, please skip this for the time being.] (b) Estimate the current price (per share) of Company A's stock. (c) Compute stock B's dividend yield. (d) What is your total return of holding Company B's stock for year 1? (e) How much wealth can Simon and Vanessa expect to accumulate from their stock investments immediately after holding both stocks for 4 years? Assume that the dividends in Year 4 have just been paid, and all dividends received can be reinvested at an average yearly rate of 20%