Question
You are a financial analyst for Guidance Investment Sdn Bhd, and you are looking for undervalued securities. After searching the market, you identify Stock A,
You are a financial analyst for Guidance Investment Sdn Bhd, and you are looking for undervalued securities. After searching the market, you identify Stock A, Stock B and Stock C as potential purchases. Stock A is currently selling at RM100 with an expected dividend of RM 6 and constant growth rate of 5%, while Stock B is a preferred stock, currently selling at RM 60 with a RM5 dividend paid each year, and Stock C with a current stock price of RM78, annual dividend of RM5 and it is expected that the dividend will grow at 4% in the coming two years and then increase by 5% per year thereafter. Answer the following questions on the basis that you believe the required rate of return for three stocks should be 10%:
(i)How much would you pay for Stock A?
(ii)How much would you pay for Stock B?
(iii) How much would you pay for Stock C?
(iv) Which security is undervalued? Why?
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