Question $1(20$ marks$)$

Use the following information for parts A to C$.$

Orange Limited's $($Orange$)$ earnings per share is $$4\mathrm{.}00$ this year and it's dividend payout ratio is $40\%.$ Orange stock has a beta of $1\mathrm{.}6$ and its return on equity is $16\%.$ The expected rates of return of the S&P $500$ and the T$-$Bills are $14\%$ and $2\%$ respectively. Answer the following questions in the context of constant growth dividend model.

A$.$ Calculate the required rate of return on the stock.

$(3$ marks$)$

B$.$ Calculate the constant growth rate of the stock.

$(3$ marks$)$

C$.$ Calculate the stock's intrinsic value per share.

$(4$ marks$)$

D$.$ The required rate of return on Melon Limited stock is $12\%.$ The company's return on equity is $14\%.$ The current dividend payout ratio is $60\%.$

Explain what would happen to the intrinsic value of the stock if the company reduces its dividend payout ratio to below $50\%.$ No calculation is needed for this part.

$(4$ marks$)$

E$.$ Banana Limited's stocks just paid a dividend of $$6$ per share today. The dividend is expected to grow at a rate of $25\%$ p$.$a$.$ for the next $2$ years. After that the dividend growth rate will fall to a stable $4\%$ p$.$a$.$ forever. The required rate of return on the stock is $10\%.$ Calculate the intrinsic value of the stock today.

$(6$ marks$)$