MAF653 FINANCIAL MARKETS

EXERCISE 2: SHARES VALUATION

1. The common stock of Napco Bhd is currently selling at RM80 per share. The leadership
of the company intends to pay a RM4.00 per share dividend next year. With the
expectation that the dividend will grow at 5% perpetually, what will the market’s required
return on investment be for Napco Bhd common stock?

2. You are considering the purchase of a share of stock in a firm for RM40. The company is
expected to pay a RM2.50 dividend at the end of the year and its market price after the
payment of the dividend is expected to be RM45 a share. What is the expected return on
the investment in this stock?

3. Dennis is considering extending its current investment portfolios by including financial

securities like shares. At the beginning of the year 2021, Dennis predicts that
pharmaceuticals industry is expected to do well due to the demand of Covid-19 vaccine.
Dennis is considering investing in the stock of either Chirovac Pharmaceuticals or
Ginepharm Pharmaceuticals. The stock of Chirovac and Ginepharm is now selling at
RM28 and RM30 respectively. Dennis decides that, since the price of Chirovac’s share is
lower than that of Ginephram, he should invest in Chirovac.
Required:
i. Evaluate the value of Chirovac and Ginephram share based on the following
information and select which share is worth buying.
 Chirovac is expected to pay a dividend of RM2.00 per share until indefinite future.
 Ginepharm paid dividend of RM1 per share last year. The dividend is expected to
grow by 5% annually in the subsequent years.
Assume the investors’ required rate of return on similar risk investment is 8% per
annum.
ii. Based on your findings in (i), explain whether Dennis decision to invest in Chirovac
because its share price is lower than that of Ginephram is the right thing to do. Justify
your answer. (6 marks)
MAF653 FINANCIAL MARKETS
EXERCISE 2: SHARES VALUATION

4. Elvira Bhd is a company specializing in the production of rubber products. The share
price of the company is at RM43.50 per share. Recently, Elvira paid a dividend of
RM4.00 per share and the company expects that the dividend will stay constant for
another 3 years. Shasha is considering an investment in Elvira Bhd and seek your
opinion on the action she should consider.

Required:

If the rate of return on similar investment is 10%, propose the actions to be taken by
Shasha if:
i) after the third year, the dividend decreases to RM 3.00 until indefinite future.
ii) after the third year, the dividend grows at 5% for two years and later grows at 1% per
year indefinitely. (6 marks)