En. Ibrahim is considering to purchase 1,000 common shares from Company ABC. Dividends from the shares are payable at the end of half-yearly. The next dividend is due in exactly six months and is expected to be RM0.55 per share. The required nominal rate of return is 10% convertible semi-annually and an estimated nominal rate of future dividend growth is 2% convertible semi- annually. (i) Calculate, showing all working, the price that En. Ibrahim should pay for the shares.  As a result of a recently announced expansion plan by company ABC, En. Ibrahim increases the estimated rate of future dividend growth to a nominal rate of 3% convertible semi-annually. (ii) Calculate the maximum price that En. Ibrahim should now pay for the shares. (iii) Explain the difference between your answers to part (i) and part (ii

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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En. Ibrahim is considering to purchase 1,000 common shares from Company ABC. Dividends from the shares are payable at the end of half-yearly. The next dividend is due in exactly six months and is expected to be RM0.55 per share. The required nominal rate of return is 10% convertible semi-annually and an estimated nominal rate of future dividend growth is 2% convertible semi- annually.

(i) Calculate, showing all working, the price that En. Ibrahim should pay for the shares. 

As a result of a recently announced expansion plan by company ABC, En. Ibrahim increases the estimated rate of future dividend growth to a nominal rate of 3% convertible semi-annually.

(ii) Calculate the maximum price that En. Ibrahim should now pay for the shares.

(iii) Explain the difference between your answers to part (i) and part (ii).

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