FM Chapter 15 Questions Test 1 – The valuation of securities – theoretical approach
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In the question 4 it is not said that the dividends will continue to grow, nor that they will remain stable after that growth. Why did we assume that the will continue to grow steadily in the same proportion?
I am afraid that this is wording you will have to get used to (this is an actual past exam question).
That sounds Scary and defies logic of most people
Why does it defy logic of most people? What else would you assume? Any potential investor would expect the dividend to continue to increase – they would certainly not expect it to suddenly stop after one year!!
in reference to Question 3- Although I tried to run an example to get the correct answer for statement 1. however, I couldn’t understand the reasoning behind it. If the rate of return is increasing then the share price should ideally be increased (per my understanding).
Apologies for such silly question
I assume that you have watched my free lectures on the valuation of securities. You should therefore remember that the market value of a share is the present value of the expected future dividends discounted at the shareholders required rate of return. Discounting at a higher interest rate gives a lower PV and hence a lower share price.
because the company is more risky so the shareholder expect the more return of return so the point is why shareholder will invest in these company those are risky co , so the company will reduce the PE .in these compoany share price are already undervalued hope this will help u and u got it
Hello,
I am a little confused on question 2 regarding Rho who is about to pay a dividend.
Its states that “Rho is ABOUT TO PAY a dividend of 18c per share” Does this not suggest that 18c is the cum div price?
If it is the cum div price, what is the need to add an additional 3% of growth when the question didnt ask for the MV in one years time?
To my understanding the growth would be added when the ex div price was given in which this case it seems the cum div price was given. I would be most grateful for a correction in my understanding if i am mistaken.
Does “Just paid” not mean Ex Div and “About to pay” mean Cum div?
18c is the current dividend and the question wants the MV of the share.
The formula gives the ex div market value. Because the dividend is about to be paid we need the cum div value and this is the ex div value plus the dividend about to be paid.
100percent
im unable to udstd the question 5 how do we get the market value of 40c how is it is being calculated ?
is it calculated by int/kd method to arrive at market value pls explain the calcultation of market value
thank you
The market value is not 40c. 40c is the increase in the market value over the year.
int/kd has nothing to do with the valuation of shares – it is only relevant for redeemable debentures.
The market value at the start of the year was $3.10. Over the year there has been a gain in the share price of 0.40 and a dividend of 0.21, so a total return of $0.61.
Therefore in % terms the return is 0.61/3.10 = 19.7%
I do suggest that you read page 16 of our free lecture notes, and watch the lectures that go with it. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
ok i got it
thank you
You are welcome 🙂
Question 3/5 – sorry I’m confused why is this correct? Required return on pfreference share is usually lower than required return on ordinery share?
Many thanks!
Preference shares are less risky for the investors than ordinary shares, because they pay fixed dividends.
Since the are less risky, investors will accept a lower return.
Hi John,
Actually I was referring to the question with first sentence Rho is about to pay a dividend of 18c per share.
Nevertheless, I was able to get the answer with your explanation.
Thank you!
Sorry for getting the wrong one, but I am pleased you have been able to answer it 🙂
Hi I need help on question 5 of 5.
How do we get the market value per share?
And what’s the difference between dividend just paid and about to pay in order to derive market value per share?
Thanks!
I assume that you mean the question Theta (the questions were appearing in a random order – this has now been fixed, but if because of this you meant a different question then please ask again).
You use the dividend valuation formula that is given on the formula sheet.
Po = (20 x 1.06) / (0.20 – 0.06) = $1.51
The formula gives an ex div price (ex div means that they have just paid a dividend).
If they were about to pay a dividend (which is a cum div price) then the market value would be Po (using the formula) + the dividend about to be paid.
I really do suggest that you watch our free lecture on this because it is all explained in the lecture.
Our lectures are a complete course for Paper F9 and cover everything you need to be able to pass the exam well.