The cost of capital – The cost of equity – ACCA Financial Management (FM)
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Hello Sir, What are the uses of DVM as it is based solely on dividends, taking no account of market conditions, It won’t possibly be accurate and we as accountant should not convey information that is not accurate. Wouldn’t it be invalid then?
Two things.
Firstly it does take account of market conditions in that it uses shareholders expectations of future dividends.
Secondly it is nothing to do with the financial accountant. It is the financial manager who makes decisions when appraising new investments and DVM is just one factor that he/she will consider. They will also consider CAPM which is generally regarded as better, but no method can possibly ever be regarded as being completely accurate.
Thank you very much.
Very interesting session thanks a lot.
According to ACCA’s latest formula table, the cost of capital formula of re= d0(1+g) is given right next to the formula for the market value of shares.
Thank you for letting me know this! God bless.
In example 4 for the dividend growth estimate when im doing the square by 4 in keep getting 1.92 and not your answer? any idea whetre im going wrong? 33,000/28,000=1.17857 squared by 4
thanks,
james
It is the 4th root, not to the power 4.
Sir is the growth mentioned (g) the growth in dividend. does it mean higher the dividend we have the pay the higher the cost of capital? is that why we are looking at the dividend growth?
Sir Do I need to watch previous lectures to understand this chapter better? Is this chapter dependent to other chapters?
It is best to watch the lectures in chapter order. This chapter isn’t heavily dependent on earlier chapters, but does assume that you understand the nature and the reason for discounting.
Sir why do we not use cost of equity in order to determine the market value of share in 2 years time. what I mean is if they require 14% they the market value in 2 years time will also should reflect this shouldn’t it?
I assume that you are referring to example 6. The MV in 2 years time is the PV of the dividends thereafter. However since all the dividends are higher than they are now due to 2 years growth, the MV (i.e. the present value) will be automatically higher than it is now by 2 years growth.
In example 6, Why is it that while using the Market value formula, the growth rate is different to using the ‘rb’ growth method.
i.e. Po= 2.80, Do= 0.20, g is unknown, Re= 0.18
2.80 = 0.20 (1-g)
————— , the value for g is 10.13% whereas rb gives you a vale of 6.75%.
0.18 +g
Could you please let me know where I’m going wrong here?
Thank you very much.
Just because the rate of return on reinvestment is 18%, it does not mean that the shareholders required rate of return is 18%.
Mr. Moffat, when calculating the figure of shareholders expected return, MUST we express all the figures in CENTS OR DOLLARS??????? I am confused……
Nevermind, I confirmed the figures myself with recalculation, I am truly sorry for disturbing the class, I truly apologize……… I really wish there was a delete option, I am truly sorry for the disturbance
If a company paid no dividend and instead re-invested all earnings in growth then how would the Cost of Equity / market value be determined?
It would still be the present value of expected future dividends and investors will be expecting dividends at some time in the future even if it is not next year.
@altun: I know it’s a late reply but it would be better if you repost this in the Ask the FM Tutor Forum :)!
Dear Mr John,
Thank you very much for your effort and i really appreciate the way you explain on every aspect in this Subject.
Thank you for your comment 🙂
Hello John,
Thank you for all your hard work and making this resource available free of charge.
Just to let you know in the lecture notes (for Sep-Dec 2019 exam) you need to correct a typo in the answer for chapter 17 example 2. Currently it says Do is 30c but it should be 40 (the answer is the same though).
Thank you for letting me know (and thank you for your comment).
I think the answer in example 6 is wrong.
In example 6, I can indicate that the dividend payout ratio is 0.2/0.32 = 37.5%.
I think that the proportion retained should be b = 100 – 37.5 = 62.5%.
No – the answer is correct.
The dividend payout ratio is indeed 020/0.32, but that is not equal to 37.5% !! It equals 62.5%, and so the proportion retained is 100 – 62.5 = 37.5%.
Sir are this online notes are enough to study for ….or do we have to study from kaplan textbook as well …
Provided that you are watching the free lectures that work through the lecture notes, then you do not really need the Study Text – they are a complete free course and cover everything needed to be able to pass the exam well.
The book that is essential is the Revision Kit because it contains lots of past exam (and other exam standard) questions. Question practice is vital to passing the exam.
Are the lecture videos available to download as well?
No – they can only be watched online.
In example 6, why the market value of shares grow at the same rate of dividend, but not the required rate of return?
The market value is always the present value of the future expected dividends.
If we go forward a year in time, then the future dividends will all be higher by the dividend growth rate, and therefore the present value in a years time will also be higher by the same dividend growth rate.
(the required rate of return depends on the general rates of return in the country and the riskiness of the shares – it does not depend on the dividend growth rate)