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The cost of capital (part 1) – ACCA (AFM) lectures

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  1. Hi, wanted to thank you for having all of this accessible. This would be my first ACCA exam due to exemptions and I wanted to ask on where to find the examples that are used in the lecture? For example the 30p dividends and MV=2.4. I am open to paying for the resources if necessary, just want to have them to follow along easier

    Kind regards,

    • If you click on ACCA on the top bar, then click on AFM, you will get to the main AFM page which has links to all of our free resources including the Course Notes that you can download free of charge 馃檪

  2. thank you sir for the lecture.
    Sir in example 4, if we calculate using the formula the the average growth comes out to 4.19% and if we use the average out the annual growths we get 4.31%, so there is a slight difference in the result.
    Therefore, will the examiner grant us the marks equally for both methods or does he prioritize one method over another?

    • The formula does give the average. It is the geometric mean and you cannot use the arithmetic mean on growth rates.

      Having said that, the examiner probably would allow it or if not then only deduct 0.5 marks 馃檪

  3. Hi Sir, I am struggling to understand WHY the formula for cost of equity with growth in dividends works. I have understood how to apply the formula. I do not understand the rationale behind it.

    I am aware that knowing how the formula is derived is not required in the exam. However, understanding its derivation would make it very easy for me to both remember and comprehensively understand it.

    I have searched on google to find a mathematical proof or derivation of the formula with no luck. If you could help me out it would be much appreciated.

    • Po = PV of future dividends = Do(1+g)/(1+r) + Do (1+g)^2/(1+r)^2 + Do(1+g)^3/(1+r)^3 + …………

      Multiply everything by (1+g)/(1+r):

      Po(1+g)/(1+r) =Do(1+g)^2/(1+r)^2 + Do(1+g)^3/(1+r)^3 + …………

      Subtract everything in this last equation from everything in the equation in the first line:

      Po – Po(1+g)/(1+r) = Do(1+g)/(1+r)

      Multiply everything by (1+r):

      Po(1+r) – Po(1+g) = Do(1+g)

      Po = Do(1+g)/(r-g)

      There you go 馃檪
      If you are happy with the algebra then fine, if not then just learn how to use the formula (this is the only way of proving it).

      • Will make a note though for future readers of this comment thread and would appreciate you signing off on this, the denominator is (r-g) and not (1-r) on the right hand side of the formula

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