Convincing Features
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Q1 (a) You are considering investing in HOG REIT. Suppose it is currently undergoing expansion and is expected to remain its cash dividend while expanding for the next 3 years. Its current dividend is RM1.50 per annum. After the expansion is completed, higher earnings are expected to result causing a 30% increase in dividends each year for 4 years. After that, the dividend growth rate is expected to be 3% per annum forever. Given that T-Bill is yielding 5%, market return is 10% and beta of the stock is 1.6
(i) Calculate the required return for HOG REIT’s common stock.
(ii) Based on the required return that you obtained in (i), what is HOG REIT’s
stock worth today?
(iii) If the current price of HOG REIT’s stock is RM30, would you buy the stock?
(b) Frank Martin is the sole owner of Valiant Cycle, a bicycle shop business which he started two years ago. At the same time, he is also one of the shareholders of Bumi Logistics Berhad. So far, Frank is very happy with the good earnings from both businesses. However, he finds that in terms of taxation, his investment in Bumi Logistics Berhad seems to be at a disadvantage compared to Valiant Cycle. Explain why.
Q2. (a) Clifford Asnees notes that while “critics of international diversification observe that it does not protect investors against short-term market crashes because markets become more correlated during downturns, this observation misses the big picture’. Over longer horizons, underlying economic growth matters more than short-lived panics with respect to returns, and international diversification does an excellent job of protecting investors. Comment on this statement.
(b) i) As the accountant for Prolific Sdn. Bhd., you will be doing the analysis of the company’s financial position and present the report to the CEO. While
preparing for the presentation, you realised that the information of the
company’s net profit after tax is missing for the recent year. Therefore, you
are required to find the company’s net profit after tax based on the following
available information in order to complete the report.
Return on total assets = 3%
Total asset turnover = 0.4
Cost of goods sold = RM135,000
Gross profit margin = 0.25
(b) ii) Among the various profitability ratios, which one do you think is most likely of greatest concern to the investing public? Explain.
(c) When assessing the potential return on investment, consider all the elements at play, including yield, capital gain, risk, expenses and taxation. Return comprises both income and capital gain, less expenses. There are also significant tax implications when purchasing an investment property. Risk plays a part when you consider the worst-case scenario and whether or not you can afford it. Broadly speaking, investment decision relies on making most of its return from the project activity, whereas residential investments tend to rely more heavily on making a capital gain.
Calculating your figures before you invest is critical to make sure your investment return is worth the risk. Thus, definition of the required rate of return is the minimum that a project or investment must earn before company management approves the necessary funds or renews funding for an existing project. Give your comment on the above statement.
(d) Discuss TWO (2) types of agency costs in an agency problem and provide an example for each.
