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Nevo Co
Nevo Co has annual sales revenue of $100m and a net operating profit (before interest and tax) of $10m. The company’s operating gearing is 4.5. It has longterm debt of $100m on which it pays fixed interest of 12% per annum. Nevo Co has 150 million $1 ordinary shares in issue. It has never paid a dividend to its ordinary shareholders but it is expected to pay a dividend from next year (in one year from today). Next year’s dividend will be $0.20 and is expected to grow at 5%. Its cost of equity is 12%.calculate share price.
answer as per BPP
The dividend valuation is next year’s dividend (d1) divided by the cost of equity reduced by the anticipated growth rate in dividends. $0.20/(0.12-0.05) = $2.857.
as per my understanding
next year dividend . .20 per share
growth 5%
.2*1.05/(.12-.05) . 3
3.2*.893=2.857can someone explain bpp logic
In the formula, the numerator is Do(1+g).
Do is the current dividend, and therefore Do(1+g) is the dividend in 1 years time. Given that this question tells you what the dividend in 1 years time is, we do not multiply by (1+g).
I explain this in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Respected Sir
if i see example 7 of chapter 15 of free lecture notes u apply discount factor and growth factor after two years. that example concept will not be applied in this question?like i do..
“in one year time there is no growth but after that 5%) so we apply discount factor of 1 year?what BPP is doing in one year is they divide dividend with the factor “re-g” if i apply example 7 concept then shouldnt it be like
next year dividend . .20 per share
there after growth 5%.2*1.05/(.12-.05)= . 3
3+.20= 3.2*.893=2.857
In future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
I really don’t think that you have read my previous reply properly.
However, by all means do it your way – you get exactly the same answer, and it is irrelevant in the exam how you arrive at the answer.
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