Reference no: EM132825219

Question - A Pension fund has requested XY Mutual Funds to present an investment seminar to the staff and its members. Razak, the senior vice presidents of XY Mutual Funds has asked your hemp to prepare the content for the presentation.

To illustrate the common stock valuation process, Razak has asked you to analyse ABC berhad, an IT solution company that supplies business analytics software. You are to prepare the answer the following questions:

a. Explain how to value any stock, regardless of its dividend pattern.

b. If risk-free rate is 4% and the market risk premium is 6%, what is the required rate of return on the firm's stock, given that its beta coefficient is 1.2?

c. If the company is a constant growth company whose last dividend (D0, which was paid yesterday) was RM 0.50 and whose dividend is expected to grow indefinitely at 5 %.

i. What is the firm's expected dividend stream over the next 3 years?

ii. What is the firm's current stock price?

iii. What is the stock's expected value 1 year from now?

d. Assuming that the stock is currently selling at RM 6.20, what is the expected rate of return on the stock?

e. Now assume that the company is expected to experience supernormal growth of 50 percent for the next 2 years, thereafter return to its long-run constant growth rate of 5%.

What is the stock's current value under these conditions?

f. If the company's earnings and dividends are expected to decline by a constant percent per year, that is g = -4%, why would anyone be willing to buy such a stock, and at what price should it sell?