Question

a) Iriz's stock is currently selling for RM160.00 per share and the firm's dividends are expected to grow at 5% indefinitely. In addition, Iriz's most recent dividend was RM5.50. The expected risk-free rate of return is 3%, the expected market return is 8%, and Iriz has a beta of 1.20. Required: i. Calculate the expected return based on the dividend growth model. (2 Marks) ii. What is the required return based on the CAPM? (2 Marks) iii. Would Iriz be a good investment at this time? Explain. (2 Marks) b) Mr. & Mrs. Rashan wish to purchase a boat in 8 years when they retire. They are planning to purchase the boat using proceeds from the sale of their property which is currently worth RM90,000 and its value is growing at 7% a year. The boat is currently worth RM200,000 increasing at 5% per year. In addition to the value of their property, how much additional money should they deposit at the end of each year in an account paying 9% annual interest in order to be able to buy the boat upon retirement? (4 Marks)

Answer 1

Ans 1 (i) Expected Return = Expected a Dividend' Current Price + Growth [dividend growth] -X100 model Do (1+3) '5.50 x (1 +05) - x100 + 160 5% + 5% 5.775 x100 = 8.61% Market Risk- . Return rate ] (ii) Requivad Return Risk-free + - free S rate 1 [CAM] 334 1.20 8% - 37] = 3 + 6 9% (iii) No, iriz is not a good investment as it is not able to meet the investors expections. i.e. → Expected Return < Required Return