FIN2102: You are considering investing in HOG REIT Suppose it is currently undergoing expansion: Financial Management Report, IIU, Malaysia

Question 1

(a) You are considering investing in HOG REIT. 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%, the market return is 10% and the beta of the stock is 1.6

(i) Calculate the required return for HOG REIT’s common stock.

(ii) Based on the required return that you obtained in (i), what is HOG REIT’s n stock worth today?

(iii) If the current price of HOG REIT’s stock is RM30, would you buy the stock?

(b) In December 2021, The AOU reports that there are overruns in the construction costs of two projects ‘The Disaster Management and Crisis Institute (IPKBN) and a Royal Malaysian Navy (RMN) college training center’ which have cost Malaysian taxpayers RM22.8mil, the Auditor-General’s Report 2020 revealed. The third series of the Report drew attention to the RM12.65mil overruns in building the IPKBN complex, which was originally estimated to cost
RM77.59mil. ‘This was due to weak planning by the Public Works Department regarding the design and scope of work, unforeseen events at the construction sites, and problems with increases in the price of building materials,” said the report. In response to this news, the cost of capital is necessary to make a project, such as building a new factory, construction and worthwhile. When analysts and investors discuss the cost of capital, they typically mean the weighted average of a firm’s cost of debt and cost of equity blended together. Explain further.

Answer

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