Consider a firm called Glowing Fish Sdn. Bhd., a fish farm company operating in Penang which has managed to genetically modify the fish so that it can raise fishes that glow at night with different colors. Its shares are trading at RM10.00 a share. It just paid RM1.5 a share dividends. Its cost of equity (cost-of-capital) is 16 percent.

(a) If you expect the dividends of Glowing Fish Sdn. Bhd. to increase at a constant rate of 2 percent a year for ever, what is the fair value of its shares? If you have a client who is considering investing in this company, would you recommend this company to the client? Briefly explain your answer.

(b) A research lab in the United States tested the glowing fish and found out that the fish has therapeutic use whereby it can lower the blood pressure of high blood pressure patients. This news increased the dividend growth rate of the Glowing Fishs from 2 percent to 5 percent. At what price do you think the shares of Glowing Fish will be trading after the news become public? Assume that the cost of equity (cost-of-capital) does not change due to this news.

(c) In part (b) above we assume that the news does not change the cost of equity. But, now assume that the news increased the future profitability of the company which reduced the probability of default of the company. This resulted in a decrease in cost of equity from 16 percent to 14 percent. Now find the fair value of the share.