Question 3: Leading to a listed company in a future (21 marks) Bonnie is concerned she may not have enough money to expand the company given how quickly the industry is doing. She is thinking of asking external parties to contribute capital into a business. You advise her to consider issuing stocks a common way of raising capital when a company gets listed. Using available information from a sample of firms which can be considered comparable to Bonnies business in the future. You estimate, explain and advise her on the following issues.

i) A comparable firm is expected to pay dividend of $1 next year. Your forecast indicates that dividend of this company can increase by 4% in the following year. Dividend will increase by 5% and 6% before revert to 3% per year indefinitely. Given a level of risk, you consider that it is appropriate to accept a rate of return of 4% per year. What should be the price of this stock? The stock under your valuation is current traded at $106, what should you advise Bonnie do? [12 marks]

ii) Bonnie appears hesitant to accept this level of risk. From her view, a level of risk should be lower. Without any calculation, what will happen to your initial valuation? [3 marks]

iii) What are potential issues in your valuation for Bonnie to be concerned as indicated above? [6 marks]