You are considering the purchase of 200 shares of Alpha Ltd. The stock currently pays a $5 dividend. The company just announced that it will increase the dividend by 10% next year and will continue to do so for the foreseeable future. You believe that the required return (r) on the stock is 15%. 1. What is the intrinsic value of a share of Alpha stock? What must you pay to purchase 200 shares of the stock today? (4 marks) 2. Suppose that the stock is now trading in the market at a price of $150. Given your answer in part 1) what should you do? Assuming that you have a margin account with $10,000 in cash, will you be able to execute his strategy to buy 200 shares? Why or why not?
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