Question 3 a) Your best friends Adam and Edward are arguing with each other on whether...

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Question 3 a) Your best friends Adam and Edward are arguing with each other on whether dividend policy would affect firms' value during a dinner gathering. Adam is very firm in his view that dividend policy is irrelevant, while Edward stands sharp against Adam's view that dividend policy is relevant to firms' value. You are required to explain to Edward that THREE (3) dividend theories show dividend policy is irrelevant. (15 marks) b) You are considering investing-in Joo Ann Berhad. Suppose it is currently undergoing expansion and is expected to remain its cash dividend while expanding for the next 3 years. Its current dividend is RM1.50 per annum. After the expansion is completed, higher earnings are expected to result causing a 30% increase in dividends each year for 4 years. After that, the dividend growth rate is expected to be 3% per annum forever. Given that T-Bill is yielding 5%, market return is 10% and the beta of the stock is 1.6. (i) Calculate the required return for Joo Ann Berhad's common stock. (5.33 marks) (ii) According to the required return that you obtained in (i), what is Joo Ann Berhad's stock worth today? (11 marks) (iii) If the current price of Joo Ann Berhad's stock is RM30, would you buy the stock? (2 marks) Question 3 a) Your best friends Adam and Edward are arguing with each other on whether dividend policy would affect firms' value during a dinner gathering. Adam is very firm in his view that dividend policy is irrelevant, while Edward stands sharp against Adam's view that dividend policy is relevant to firms' value. You are required to explain to Edward that THREE (3) dividend theories show dividend policy is irrelevant. (15 marks) b) You are considering investing-in Joo Ann Berhad. Suppose it is currently undergoing expansion and is expected to remain its cash dividend while expanding for the next 3 years. Its current dividend is RM1.50 per annum. After the expansion is completed, higher earnings are expected to result causing a 30% increase in dividends each year for 4 years. After that, the dividend growth rate is expected to be 3% per annum forever. Given that T-Bill is yielding 5%, market return is 10% and the beta of the stock is 1.6. (i) Calculate the required return for Joo Ann Berhad's common stock. (5.33 marks) (ii) According to the required return that you obtained in (i), what is Joo Ann Berhad's stock worth today? (11 marks) (iii) If the current price of Joo Ann Berhad's stock is RM30, would you buy the stock? (2 marks)

Answer rating: 100% (QA)

a To explain to Edward that dividend policy is irrelevant you can discuss the following three dividend theories 1 ModiglianiMiller MM Theorem The MM t... View the full answer