Question

Blue Lagoon Berhad has issued 200 millions shares 5 years ago at RM4.20 per share. 20% of
its shareholders are the preferred stockholders. Two months ago, the common stock is selling
at RM12.35 per share while the preferred stock is selling RM7.65 per share. The firm has
made an analysis and shows it’s beta is 1.5 where it’s stock is more volatile than the market.
The treasury bill rate presently at 3.5% and the market return on expected portfolio is 7.8%.
Presently, the common stock and preferred stock price reduce by 30% and 10%. The beta and
the market return on expected portfolio also reduce to 1.1 and 5.3% while the treasury bill
rate is remain the same. The firm recently paid the dividend for the common stockholder at
RM2.50 per share while for preffered stock holder is RM2.00 per share. The firm expected
that the dividend for the next year will reduce by 20%.
The firm plan to change its current growth rate from 30% to 15% after 3 years and reduce to
8% after 5 years and it will reamin thereafter. The firm currently is to achieve the firm goal to
maximize its shareholders wealth and to give a good compensation and benefits to its staff
and good services to its stakeholders.
Required:

a. Find the required rate of return for both stocks.


b. What is the value of the common stock today?


c. What is the value of the common stock today after the firm reducing its growth rate
from 30% to 8% after 5 years?


d. Are you prefer to bud common stock or preferred stock? What is the value of the
common stock today after the firm reducing its growth rate from 30% to 8% after 5
years?

Answer 1