Question $3$

a$.$ Assume you are a financial manager, managing your client investment. Your client has two

options of investment as presented below.

Stock A : Seaview Inc's is expected to pay an annual dividend of RM$5\mathrm{.}00$ per share at the

end of the year. This dividend is expected to remain constant for an indefinite period.

Stock B : Lakeview Inc's dividend will grow at a rate of $27\%$ this year, $30\%$ next year, $20\%$

the following years and $10\%$ thereafter. The current dividend $(D_0)$ is RM$0\mathrm{.}90.$

Stock C : Landview Inc's is expected to pay an annual dividend of RMO. $32$ per share at the

end of year $1$ and this dividend is expected to grow at a rate of $9\%$ annually. Compute the

value of this stock if the required rate of return is $10\%.$

From the above information you are required to:

i$.$ determine the price of today's stocks for each, if the required rate of return is $15\%,$

$(15$ Marks$)$

ii$.$ based on your answer in part $($a$)$ recommend which stock is the best for your client to

invest in$.$ Explain your recommendation.

$(5$ Marks$)$

b$.$ Suasana Berhad had issued a bond. The bond has $10$ years remaining to maturity. Interest

is semi$-$annually, the bonds have a RM$1,000$ par value, and the coupon interest rate is $10\%.$

Calculate the current market price of the bond when the required rate of return is $6\%.$

$(5$ Marks$)$

$($Total: $25$ Marks$)$