UBFF 2013 BUSINESS FINANCE (MAY 2010)

UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF BUSINESS AND FINANCE

ACADEMIC YEAR 2010

BACHELOR OF BUSINESS ADMINISTRATION (HONS) BANKING AND FINANCE

BACHELOR OF BUSINESS ADMINISTRATION (HONS) ENTREPRENEURSHIP

YEAR 2

TUTORIAL 8

Learning Outcome:-

On the completion of this unit, student shall be able to:

Discuss the characteristic and feature of common and preferred stock. Apply preferred and common stock valuation.

8-1 What factors make the valuation of common stocks more complicated than the valuation of bonds and preferred stocks?

8-2 (a) What approaches can be taken in valuing a firm's stock when there is no cash dividend payment?(b) What factors might influence a firm's price-earnings ratio?

8-3 In what ways is preferred stock similar to long-term debt? In what ways is preferred stock like common stock?

8-4 The common stock MP paid RM1.32 in dividend last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years.

a. If MP’s current market price is RM23.50, what is the stock’s expected rate of return?

b. If your required rate of return is 10.5 percent, what is the value of the stock for you?

c. Should you make the investment?

8-5 Garden Beauty provides maintenance services for commercial buildings. Currently, the beta on its common stock is 1.08. The risk-free is now 10 percent, and the

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UBFF 2013 BUSINESS FINANCE (MAY 2010)

expected return on the market portfolio is 15 percent. It is january1, the company is expected to pay a RM2 per share dividend at the end of the year, and the dividends is expected to grow at a compound annual rate of 11 percent for many years to come. Based o the CAPM and other assumption you might make, what dollar value would you place on one share of this common stock?

8-6 Over the past 5 years, the dividends of the Dave Corporation have grown from RM0.70 per share to the current level RM1.30 per share (D0). This growth rate is expected to continue for the foreseeable future. What is the value of a share of Dave Corporation common stock to an investor who requires a 20 percent return on an investment?

8-7 Novak Company is entering into a 3-year remodeling and expansion project. The construction will have a limiting effect on earning during that time, but when it is complete, it should allow the company to enjoy much improved growth in earnings and dividends. Last year, the company paid a dividend of RM3.40. It expects zero growth in the next year. In years 2 and 3, 5 percent growth is expected and in year 4, 15 percent growth. In year 5 and thereafter, growth should be a constant 10 percent per year. What is the maximum price per share that an investor who requires a return of 14 percent should pay for Novak Company common stock?

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