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This is a question from the opentuition mock exam Section A
A company has 4 million shares in issue with a nominal value of $0.50 per share. A dividend of 24 cents per share has just been paid.
Four years ago the dividend was 20.51 cents per share.
The Beta of shares in the company is 0.5. The risk free rate is 3% and the market premium is 8%.
What is the market capitalization of the company?
The answer to the question in the explanation was given as $33,280,000
But I got the answer as 66,560,000(this option too was available)
(4M/.50*8.32)Why shouldn’t we divide the number of shares(4M) by nominal value $0.50???
But dividing would make no sense.
There are 4M shares. Each share has a nominal value of $0.50, and so the total nominal value is 4M x $0.50 = $2M/
However the nominal value is of no relevance to this calculation. There are 4M shares and the total capitalisation is therefore 4M x market value per share.
Have you watched my free lectures on this? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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