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1. a. AML Ltd. Currently pays a dividend of Rs. 2 per share and this
dividend is expected to grow at the rate of 15% for the next three
years, then at the rate of 10% for next three years after which the
growth rate will decline to 5 % and remain at that level forever.
You are required to determine:
i) The value of the company’s stock if the required rate of
return is 18%?
ii) Whether the value will be different if the investor is
expected to hold the stock for three years? (7)
1. b. There are three mutually exclusive projects with the following cash
flows:
Year Project A Project B Project C
0 - Rs. 10,000 Rs. 5,000 - Rs. 15,000
1 Rs. 8,000 Rs. 5,000 Rs. 10,000
2 Rs. 7,000 - Rs. 8,000 Rs. 0,000
The cost of capital is 12%. You are required to select one of these
projects:
i) Which project would you pick using the NPV Rule?
ii) Which project would you pick using the IRR Rule?
iii) Is there any conflict in ranking? How would you explain the
conflict? (7)
Section B