Question 3 (12 marks)

Kempinski Ltd. has just paid a cash dividend of $2 per share. The market forecasts that the

dividend payments of the company will grow at 20% per year for the next three years, 15% for

the following year and then settle down to 10% per year afterwards.

Given the risk-free rate is 4%, the market risk premium is 10% and Kempinski's stock has a

beta of 1.2.

(a) What is the required return for Kempinski based on CAPM?

(2 marks)

(b) Calculate the (intrinsic) value of Kempinski stock at time 0.

(6 marks)

(c) Given the expected dividend growth path (as forecasted above), is Kempinski's share over-

valued or under-valued if it is selling at $100 three years from now? What is the trading

signal it implies?

Kempinski Ltd. has just paid a cash dividend of \$2 per share. The market forecasts that the dividend payments of the company will grow at 20% per year for the next three years, 15% for the following year and then settle down to 10% per year afterwards. Given the risk-free rate is 4%, the market risk premium is 10% and Kempinski's stock has a beta of 1.2 . (a) What is the required return for Kempinski based on CAPM? (2 marks) (b) Calculate the (intrinsic) value of Kempinski stock at time 0. (6 marks) (c) Given the expected dividend growth path (as forecasted above), is Kempinski's share overvalued or under-valued if it is selling at $100 three years from now? What is the trading signal it implies? (4 marks)