Cum Div

Hello Mr John Q 314  MAT CO Kapla F9Exam Kit 2022-2023

For the following question in the model answer they use the cum dividend i.e the dividend about to be paid in the dividend growth model as

Value per share =   5.0 x 1.0684
——————— =72.6c or $0.726 
0.142 ? 0.0684

But as per the formula and also in your lectures you said it should be the dividend which has been paid

So is it okay to use the cum div in the dividend growth formula or we must use the last paid dividend which is 4.7 cents according to the information given??

Also it was used in finding the growth rate in formula
Annual dividend growth (g) = (current dividend/dividend from n years ago)1/n – 1  g = (5.0/4.1)1/3 – 1 = 0.0684 

is that ok

it is a little bit confusing ,

Thanks,

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Q
Required:  (a)  Calculate the total equity value of MAT Co using the dividend growth model. ?     (6 marks)  (b)  Comment on the relevance of the total equity value calculated when compared to  the total market value of the equity of the company. ?  (5 marks)  (c)  Explain the factors the directors of MAT Co should take into account when  considering how to raise additional finance. ? 

Answer

To calculate the cost of equity (re) using CAPM, we have the formula (from the sheet)  E(r)j  =  Rf + ?j (E(rm) – Rf)  re = 5% + (1.15 × 8%) = 14.2%  Annual dividend growth (g) = (current dividend/dividend from n years ago)1/n – 1  g = (5.0/4.1)1/3 – 1 = 0.0684 

Value per share =   5.0 x 1.0684
  = 72.6c or $0.726  0.142 ? 0.0684 Total number of shares = $40m ÷ $0.25 = 160 million  Total equity value (ex div) – 160m × $0.726 = $116.16m