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Omar is considering investing his money in Berjaya Bhd. He is fully aware that the firm would cease its operation in the next five years.
Omar is considering investing his money in Berjaya Bhd. He is fully aware that the firm would cease its operation in the next five years. This situation does not worry him at all as he is planning to liquidate his investment in five years time. Berjaya Bhd's share is currently traded at RM60 per share. Omar forecasts that the firm will pay an annual dividend of RM5 per share for the next five years. At the end of the fifth year, the firm is expected to pay a final and liquidating dividend of RM80 per share when it ceases its operation. The current rate of return on the risk free investment is 12% while that of the market portfolio is 15% per annum. Omar also learnt that the firm's beta is -1. Required: i Advise Omar on whether investing money in Berjaya Bhd's share is a good investment (5 marks) ii. If the rate of return on the market is 8% instead of 15%, briefly explain whether your decision in (1) would be different. And evaluate the impact on Omar's returns on investment if he decided to invest his money in Berjaya Bhd's share. (5marks)
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