Suppose En Alex, an investor has RM500, 000 and is contemplating investing in the shares of BOTEX Berhad, whose current market price is quoted at RM3.55 per share. The shares of BOTEX Berhad have a beta coefficient of 1.55, current rates of return on government Treasury bills and the market are 8.5% and 15% respectively. BOTEX paid a net dividend of RM0.238 per share recently. The normal dividend growth rate is 5.5%.

Required:

Advise En Alex whether it is worthwhile buying the shares of BOTEX Berhad. What should the equilibrium market price be?

1. Suppose in addition to the decline in the rate of return on Treasury bills of 6.5%, the market risk-aversion declines such that the expected market rate of return is 10.5%. At what price would you advice the investor to buy BOTEX Berhads stock?

1. If the rate of return on government Treasury bills drops to 6.5%, what will the effect on the price of BOTEX Berhads stock be?

1. Assume that the company experienced supernormal growth rate of 25 percent in the first three years and then return to its long-run constant growth rate of 6.5 percent, what would be the stock value under these conditions?) (Hint: Use answer (b) for your return rate of return on stock.