Question:

a. Le Mustang company Ltd is foreseeing a growth rate of 15 per cent per annum in the next three years. It is likely to fall to 12 per cent in the fourth year. After that, the growth rate is expected to stabilize at 7 per cent per annum. If the last dividend paid was Rs.10 per share and the investors required rate of return is 20 per cent, calculate the maximum price at which you will be prepared to buy the company's shares.

b. Explain why preferred stock is more similar to debt than equity ?

c. The current dividend on an equity share of Donald company Ltd is Rs3.00.Donald is expected to enjoy an above normal growth rate of 40 % for 5 years. Thereafter, the growth rate will fall and stabilize at 12 %. Equity investors require a return of 18% from Donald's stock. What is the intrinsic value of the equity share of Donald under two- stage growth model?

d. Differentiate between systematic risk and unsystematic risk and show how such distinction is important for an investor.