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Question 2
a. Assume you are a financial manager, managing your client investment. Your client has three options of investment as presented below.
Investment 1: YangLang Inc’s common stock current dividend (Do) is RMO.40, and is expected to grow at a rate of 6% annually.
Investment 2: Alamanda Inc’s dividend will grow at a rate of 40% this year, 25% next year, 23% and 10% thereafter. The current dividend (Do) is RMO0.80.
Investment 3: Chamomile Inc’s preferred stock pays a RM2.75 dividend.
From the above information you are required to:
i. determine the price of today’s stocks for each, if the required rate of return is 15%,
ii. based on your answer in part (a) recommend which stock is the best for your client to invest in. Explain your recommendation. (2 Marks)
b. Rose&Petal bonds, have a coupon rate of 8% and a par value of RM1000, and will mature in 20 years. If you require a return of 7%, what price would you be willing to pay for the bond? (2.5 Marks)
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