ACCA AFM · Guided practice (Show me how)
Chapter 6: The Cost of Capital
Cost of equity - the dividend growth model and estimating growth
Three companies are described below. Market values are ex div.
(a) T plc has in issue 50c shares with a market value of $4.20 per share. A dividend of 40c per share has just been paid. Dividends are growing at 6% p.a.
(b) X plc: it is now the year 2001, and X plc has paid out the following total dividends in past years: 1996 $28,000; 1997 $29,000; 1998 $32,000; 1999 $31,000; 2000 $33,000.
(c) Z plc has in issue $1 shares with a market value of $2.80 per share. A dividend of 20c per share has just been paid (earnings per share were 32c). The company is able to invest so as to earn a return of 18% p.a.
Z plc wants a share-price estimate for two years' time.
(a) T plc: cost of equity
Calculate T plc's dividend for the next year and its cost of equity.
(b) X plc: growth from past dividends
Calculate X plc's average annual dividend growth from 1996 to 2000.
(c) Z plc: growth from retentions
Calculate Z plc's retention ratio, annual dividend growth and cost of equity, and its expected share price in two years.
Opening this exercise…