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A company has just paid an ordinary share dividend of 32.0 cents and is expected to pay a dividend of 33.6 cents in one year’s time. The company has a cost of capital of 13%.
What is the market price of the company’s shares to the nearest cent on an ex dividend basis?
A 3.20
B 4.41
C 2.59
D 4.20The answer is D, however when i am calculating i am getting C. Please help.
You have ignored the fact that dividends are growing.
The growth rate = 33.6/32 – 1 = 0.05 or 5%
For the dividend valuation formula, Do = 0.32; g = 0.05; and Re = 0.13.
If you put these figures in the formula, then the answer is indeed $4.20.
Have you watched my free lectures on this? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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