QUESTION 2 [15 marks]

(a) Annar Limited latest annual dividend of $4.50 was paid yesterday and maintained its historic 8% annual growth. You plan to purchase the stock today because you believe dividend growth rate will increase to 10% for the next 3 years and the selling price of the stock will be $90 per share at the end of the third (3rd) year. Your required return is 12%.

i. What is the maximum you should pay if the company dividends continued to growth at 8% indefinitely?[2 marks]

ii. Based on your beliefs, would you buy the stock if the current market price is $90 and why?[4 marks]

iii. What is the expected price after 3 years (P3), if growth for the next 3 years (years 4-6) is 9% and thereafter the company returns to its long-term growth rate of 8%?[4 marks]

(b) Describe one theory that may help an investor to determine his required rate of return. May sure to include the main assumptions and weaknesses?[5 marks]