Question 2

(a) In response to the recent stock market's reaction to its dividend policy, A Industries has decided to increase its dividend payment at a rate of 5 percent per year. Last year, the firm paid dividend of RM3.15. The required rate of interest is 10 percent. What is the maximum you would be willing to pay for a share of the stock?

(b) Narnia Bhd. has been experiencing several years of financial difficulty and, thus, has considered maintaining its dividend payment at RM1.50 indefinitely. What is the value of its common stock if the required rate of return is 8.5 percent?

(c) Canggih Bhds most recent paid dividend was RM2.50 a share. Yesterday, the firm announced the dividend expected to grow at 3 percent per year for the next 5 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10 percent required rate of return. What is the current value per share? If the share is currently selling at RM65, is the share overpriced/ underpriced? Would it be considered a good buy?