Derek invests in First Property Holding Company for years with a rate of return of 12%. The company announced the dividend policy for next year 25% per share and the dividends are expected to grow at 7% annually afterwards.

a) The company decides to expand its business in resorts and hotels. It is estimated that the expected growth rate will be increased by 2% while stockholders will raise their required rate of return to 15%. Would you suggest that Derek hold his shares of First Property Holding Company? Please elaborate and provide any numerical answer to support your decision.

b) VD Group Company is another main investment for Derek. This year, the VD Group stock’s beta is 2.5 with an expected return of 30%. Presuming that RF is 6% and E (RM) is 15%, should Derek hold the share of VD Group? Please elaborate and provide any numerical answer to support your decision.

c) Obviously, we have adopted two different stock valuation methods in parts (a) and (b), respectively. Please list, describe and compare these two methods.

Answer rating: 100% (QA)

a The numerator in the formula is the cash flow to be received next period Since the growth rate is ... View the full answer