B. OMC Bhd is a manufacturer and distributor of fuels and lubricants. The firm planned to...

Transcribed Image Text:

B. OMC Bhd is a manufacturer and distributor of fuels and lubricants. The firm planned to pay a dividend of RM5 per share next year. After which, analysts forecasted that it would grow at 7% over the next four years. Then, the annual growth rate of dividends will be 8% for the foreseeable future. OMC beta is 0.9. The risk-free rate of return is estimated to be 4.8%, and the market risk premium is 8%. Required: i. II. III. Calculate the maximum price for OMC Bhd stock that investors would be willing to pay. (5 marks) Using same information, compute the intrinsic value of OMC Bhd if after the fifth year, there was no growth in dividend. (2 marks) i. However, shortly after the forecast was made, Covid-19 pandemic suddenly hit the entire globe. The movement control order which was imposed by the government affected not only the operating activities of the company but also its expected earnings. As a result, the dividend is expected to be constant at RM5 per share over the next three years. Later, it would increase at a rate of 5% over the next two years, and remains stable at 10% per annum thereafter. The investor's required rate of return is 15% to reflect the riskier investment. (6 marks) Breezy Bhd and Freezy Bhd are both listed under beverages industry on Bursa Malaysia. The average price earnings ratio for both companies are 12 and 15 respectively. Azrul, an individual investor is considering investing in shares of these two companies. The following are additional information about Breezy and Freezy. II. Analyze the impact of the pandemic on OMC's share value. (Note: Relevant supporting calculation must be shown) Breezy Bhd: The profit after tax is RM7 million and the number of shares traded is 2,000,000 units. The market price of the share is RM52. Freezy Bhd: The profit after tax is RM5 million and the number of shares traded is 1,000,000 units. The market price of the share is RM68. Required: Advise Azrul on which of the two companies he should invest in. (Note: Relevant supporting calculation must be shown) (6 marks) Explain two (2) factors affecting share price of a company. B. OMC Bhd is a manufacturer and distributor of fuels and lubricants. The firm planned to pay a dividend of RM5 per share next year. After which, analysts forecasted that it would grow at 7% over the next four years. Then, the annual growth rate of dividends will be 8% for the foreseeable future. OMC beta is 0.9. The risk-free rate of return is estimated to be 4.8%, and the market risk premium is 8%. Required: i. II. III. Calculate the maximum price for OMC Bhd stock that investors would be willing to pay. (5 marks) Using same information, compute the intrinsic value of OMC Bhd if after the fifth year, there was no growth in dividend. (2 marks) i. However, shortly after the forecast was made, Covid-19 pandemic suddenly hit the entire globe. The movement control order which was imposed by the government affected not only the operating activities of the company but also its expected earnings. As a result, the dividend is expected to be constant at RM5 per share over the next three years. Later, it would increase at a rate of 5% over the next two years, and remains stable at 10% per annum thereafter. The investor's required rate of return is 15% to reflect the riskier investment. (6 marks) Breezy Bhd and Freezy Bhd are both listed under beverages industry on Bursa Malaysia. The average price earnings ratio for both companies are 12 and 15 respectively. Azrul, an individual investor is considering investing in shares of these two companies. The following are additional information about Breezy and Freezy. II. Analyze the impact of the pandemic on OMC's share value. (Note: Relevant supporting calculation must be shown) Breezy Bhd: The profit after tax is RM7 million and the number of shares traded is 2,000,000 units. The market price of the share is RM52. Freezy Bhd: The profit after tax is RM5 million and the number of shares traded is 1,000,000 units. The market price of the share is RM68. Required: Advise Azrul on which of the two companies he should invest in. (Note: Relevant supporting calculation must be shown) (6 marks) Explain two (2) factors affecting share price of a company.

Answer rating: 100% (QA)

SOLUTION i To calculate the maximum price for OMC Bhd stock that investors would be willing to pay we need to use the dividend discount model DDM D1 RM5 next years dividend g1 7 the growth rate for th... View the full answer