n 1:

You have been hired as a consultant to analyze thebehaviourof a certain stock. The company has two million ordinary stocks outstanding and the stock has a par value of $15 per share. Management estimates that dividends will grow super normally at a 30%, 25% and 20% in years one, two and three respectively, after which they will grow at 4% into perpetuity.

The last dividend paid was $0.45 per share and the stock is of average market risk. The risk-free rate is 3% and the average market return is 9%. The stock is currently trading for $16. The company is also considering a 7 for 2 stock split.

Required:

a.How would a 7 for 2 stock split impact the company? Calculate the resulting stock price and number of shares outstanding.(4 marks)

b.Determine the required rate of return for the stock.(4 marks)

c.What is the intrinsic value of the stock?(8 marks)

d.Would you recommend the purchase of this stock?(2 marks)

e.Determine the stock's market capitalization.(2 marks)