INVESTMENT (BWFN5013)

QUESTION 1

If Hunter Berhad had a dividend payout ratio of 63% in 2021, how much was it retention

ratio?

Rentention Ratio = 1-Payout Ratio

= 1-0.63
= 37% (1 mark)

QUESTION 2

What is the growth rate if a firm has a payout ratio of 40% and consistently has an ROE of

12% per year?

growth rate = ROE x (1 – Dividend payout ratio)

=0.12 x (1-0.40)

=7.2%

(1 mark)

QUESTION 3

Ross Corporation paid dividends per share of RM1.20 at the end of 2010. At the end of 2020,

it paid dividends per share of RM3.50. Calculate the compound annual growth rate in

dividends.

CAGR = (Ending balance/Beggining Balance) (1/n) - 1

=(3.50/1.20) (1/10)-1

=11.29%

(2 marks)

1
USE THE FOLLOWING INFORMATION FOR THE NEXT TWO QUESTIONS

Ridgemont Can Company's last dividend was RM1.55. You plan to purchase the stock today

because you feel that the growth rate will be 8 percent for the next three years, and the stock

will reach RM22.50 per share by the end of the three years.

QUESTION 4

How much should you be willing to pay for the stock if you require a 15 percent return?

D1=1.55 (1+0.08) = 1.674

D2=1.55(1+0.08)2 = 1.8079
D3=1.55(1+0.08)3 = 1.9525
D4=1.55(1+0.08)4 = 2.1088
V3 = 2.1088/(0.15-0.08) = 30.1257
V0 = 1.674/(1+0.15) + 1.8079/(1+0.15)2 + 1.9525 + 22.50/(1+0.15)3
= 1.4557 + 1.3670 + 16.0760
= RM 18.90

(3 marks)

QUESTION 5

How much should you be willing to pay for the stock if you feel that a 7 percent growth rate

can be maintained indefinitely and you require a 15 percent return? Base your decision on the

DDM.

PO = D0 (1+g)/r-g

= 1.55(1+0.07)/0.15-0.07

= RM 20.73

(3 marks)

2
QUESTION 6

“The price-to-earnings (P/E) ratio is a fairly simple tool for assessing a stock value. Yet it can

also be an unreliable and a misleading tool to measure the true value of a stock.”

Do you agree or disagree with the above statement? Justify your answer.

(5 marks)

Yes i do agree with the above statement. Firstly, because whats contains in earning its not
always clear due to earning can be affected by suspicious gains or losses and management
company also can manipulated reported earning to meet their expectations which is lead to
P/E ratios and the stocks appear less expensive.
Second, its because trailling or forward earnings which forward earning is based on the
opinion of anlysis that normally tend to be overoptimistic in theie own assumpation and
guessing that lead forward earning face the problem of being a lot more useful than
historic earnings but prone to inaccuracies.
Lastly, its becasue of groth factor . If a company is developing rapidly, you can buy it even if
the P/E ratio is high, knowing that EPS growth will bring the P/E down to a more reasonable
level. You could consider for a stock with a lower P/E ratio if it isn't rising quickly. It might
be difficult to identify whether a high P/E multiple reflects predicted growth or is just
overvalued.