Question

QUESTION 2 (UNIT 3)
a) Distinguish the differences between stock splits and stock dividends.

b) Recent dividend distributed RM1. Suppose a firm is expected to increase dividends by 20% in one year and by 15% in two years. After that, dividends will increase at a rate of 5% per year indefinitely. If the required return is 20%, calculate the stock.

BBF302/05 FINANCIAL MANAGEMENT AND ANALYSIS
JULY 2020
ASSIGNMENT 2
Page 3 of 4
c) Capital Bhd. just paid a dividend of RM2.00 per share on its stock. The dividends are expected to grow at a constant 6 percent per year indefinitely. If investors require a 13 percent return on Capital stock, calculate;
i) The current stock price

ii) The stock price in 3 years

iii) The stock price in 15 years

Answer 1

Part (a):

Stock split is the process by which existing shares are split into more number of shares. By this process, number of shares will increase but the share capital will remain unchanged.

Stock dividend is the dividend paid in the form of equity shares, instead of cash. Upon distributing stock dividend, both the number of shares as well as the equity capital will increase.

Part (b):

Current stock price= RM8.67 as follows:

Part (c ):

Stock price with constant growth in dividend= D1/(r-g)

Where D1= Next year dividend, r= Rate of return (given as 13%) and g= constant growth rate (6%).

Also given, last dividend D0= RM2.00

(i): Current stock price= 2*(1+0.06)/(0.13-0.06) = RM30.29

(ii): Stock price in 3 years= 2*(1+0.06)^4/(0.13-0.06) = RM36.07

(iii): Stock price in 15 years= 2*(1+0.06)^16/(0.13-0.06) = RM72.58