Q3. (a)

SUC Bhd. latest annual dividend of RM1.25 a share was paid yesterday and maintained its historic 7% annual rate of growth. You plan to purchase the stock today because that the dividend growth rate will increase to 8% for the next three years and the selling price of the stock will be RM40.00 at the end of that time.

(i) How much should you be willing to pay for the SUC stock if you require a 12% return? (4 marks)

(ii) What is the maximum price you should be willing to pay for the SUC stock if you believe that the 8% growth rate can be maintained indefinitely and you require a 12% return? (2 marks)

(iii) If the 8% rate of growth is achieved, what will the price be at the end of Year 3, assuming the conditions in part (ii)? (2 marks)

3

(b) Terry Leong purchased a car using some cash and borrowing of RM30,000 (the present value) for 60 months at 12% per year.

(i) Calculate the monthly payment. (4 marks)

(ii) Assume he has made 10 payments. What is the balance (present value) of his loan? (4 marks)

(iii) How long, to the nearest year, would it take for the purchasing power of RM30,000 to be cut in half if annual inflation rate were 10%? Assume compounded annually. (4 marks)

(c) What is the difference between the variable-growth dividend valuation model and the dividends-and-earnings approach to share valuation? Which procedure would work better if you were trying to value a growth share that pays little or no dividends? Explain. (5 marks)

[Total : 25 marks]