Question

QUESTION 2: STOCK CHARACTERISTICS AND VALUATION
a) Compute the value of a share of common stock of Lexus Hotel Berhad whose most recent dividend was RM2.50 and is expected to grow at 3.50 percent per year for the next 5 years, 5 percent per year for the next 3 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10.00 percent required rate of return.

b) Glass Art Manufacturing Berhad has a beta of 1.50, the risk-free rate of interest is currently 12 percent, and the required return on the market portfolio is 18.00 percent. The company plans to pay a dividend of RM1.96 per share in the coming year and anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2016-2018 period.

Year	Dividend (RM)
2016	1.68
2017	1.77
2018	1.86

Estimate the value of Glass Art Manufacturing's stock.

c) Tina's Medical Equipment Berhad paid RM1.15 common stock dividend last year. The company's policy is to allow its dividend to grow at 5.50 percent per year indefinitely. Estimate the value of the stock if the required rate of return is 8.50 percent.

Answer 1

a)

	Req Rate of Return	10.0%
Growth in dividend YOY		3.50%	3.50%	3.50%	3.50%	3.50%	5.00%	5.00%	5.00%	6.00%
Year	0	1	2	3	4	5	6	7	8	9
Dividend	2.50	2.59	2.68	2.77	2.87	2.97	3.12	3.27	3.44
									91.09
Total Dividend		2.59	2.68	2.77	2.87	2.97	3.12	3.27	94.52
PV of Dividend (Discounted by Rate of return)		2.35	2.21	2.08	1.96	1.84	1.76	1.68	44.10
Value of stock in RM	57.99

b)  

Beta	1.5
Rf	0.12
Req Rate of return	0.18
Rate of return CAPM Model	21.00%	r= Rf + B * (Rm- Rf)
		5.36%	5.08%	5.38%	5.38%
	Year		0	1	2
	1.68	1.77	1.86	1.96
		DDM		13.22
		PV of dividend		10.93
		Value of stock in RM	10.93

C)  

Req. Rate of Return	8.50%
		5.30%
Year	0	1
Dividend	1.15
Value of Stock in RM By Using DDM	37.84