QUESTION THREE (28 MARKS

a.High End Berhad has just paid its annual dividend of RM3 per share. The dividend is expected to grow at a constant rate of 8% forever. If the required rate of return of the stock is 11.2%, what is its intrinsic value?

(3 marks)

b. WaterCo is a manufacturer of boat parts and has been in business only a few years. Its board of directors decided to start paying a dividend to help boost the attractiveness of its stock. The dividend will be RM0.50 per share next year. After that dividends will increase by 12% per year for the next two years. After that, the dividend is expected to increase at 6% per year indefinitely. Should you purchase shares in this firm at the current market price of RM7.50 per share if the required rate of return is 11%? Justify your answer.

(6 marks)

c. Zahid is interested to buy the stock of PMX Berhad. He has collected the following financial information on PMX:

Selected items from income statement (in '000 except per share data)SalesRM400,000DepreciationRM18,500EBITRM104,200Net incomeRM54,000Shares outstanding15,000EPSRM3.60

Selected items from balance (in '000)Total current assetsRM135,000Total assetsRM390,000Total current liabilitiesRM72,000Long term debtRM108,000Total equityRM210,000Selected items from cash flow (in '000)Increase in change in working capital (WC_t - WC_t-1)RM8,600Increase in capital spendingRM28,000Change in debt outstandingRM7,000Payment of cash dividendsRM36,400

Zahid assumes that

• PMXs earnings and free cash flow to equity (FCFE) is expected to grow at 17% a year for the next three years before stabilizing at an annual growth rate of 8%.
• PMX will maintain the current payout ratio.
• PMXs beta is 1.42, risk free rate is 6% and the market equity risk premium is 7%.

Given the above information:

i. Calculate the PMXs sustainable growth rate.

(3 marks)

ii. Calculate the value of a share of PMXs common stock using the two-stage dividend discount model.

(8 marks)

iii.Calculate the value of a share of PMXs common stock using the two-stage FCFE model.

(8 marks)