As a financial analyst, you are covering Singapore’s top commercial bank listed in the local bourse, which paid an annual dividend of $0.55/share on 31 December 2015. The expected return for the Singapore Straits Times Index is 3.8%. The risk free rate is 1.25% per annum.
(a) Your calculations show that this stock tracks the market index with a beta of 1.4. The annual dividend growth is estimated to be 2% per year, and is paid at the end of each year. How much would the bank’s share be valued at as of 1 January 2016?
(b) Due to its significant exposure to China’s economy, you are looking at scenario analysis and with the risk of a highly correlated global meltdown, you take the beta against the market index to be 2. While there is still an annual dividend growth of 0.5% per year, paid at the end of each year, you are now assuming zero dividend growth that from 1 January 2018 onwards, calculate the revised valuation of this stock as of 1 January 2016.