Financial Management

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BFN1014 Financial Management I (Semester 53) GROUP ASSIGNMENT II Question 1: Assume that you are an assistant to Fernandez, senior vice presidents of a mutual fund company. Your company had been recently requested by a major client to present an investment seminar, and Fernandez, who will make the actual presentation, have asked you to help him. To illustrate the common stock valuation process, Fernandez has asked you to analyze the ABC Berhad (ABC), a semiconductor manufacturer. You are to answer the following questions. a) Describe briefly the legal rights and privileges of common stockholders. b) i. Write out a formula that can be used to value any stock, regardless of its dividend pattern. ii. What is a constant growth stock? How are constant growth stocks valued? c) Assume that ABC has a beta coefficient of 1.2, that the risk-free rate is 7%, and that the required rate of return on the market is 12%. What is ABC’s required rate of return? d) Assume that ABC is a constant growth company whose last paid dividend (D ) was 0

RM2.00 and whose dividend is expected to grow indefinitely at a 6% rate. i. What is the firm’s expected dividend stream over the next 3 years? ii. What is its current stock price? iii. What is the stock’s expected value 1 year from now? e) Now assume that the stock is currently selling at RM30.29. What is its expected rate of return? f) What would the stock price be if its dividends were expected to have zero growth? g) Now assume that ABC is expected to experience non-constant growth of 30% for the next 3 years, then to return to its long-run constant growth rate of 6%. What is the stock’s value under these conditions? What are their expected dividend yield in Year 1? Year 4? h) Suppose ABC is expected to experience zero growth during the first 3 years and then to resume its steady-state growth of 6% in the fourth year. What would its value be then? What would its expected dividend yield be in Year 1? In Year 4?

Question II: Ahmad...
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