Chapter 15: The valuation of securities – theoretical approach

Three companies from the notes (chapter 15). Shareholders' required rates of return are given; assume market values are ex div unless the question says a dividend is about to be paid.

(a) Beta plc has in issue $0.50 shares and is about to pay a dividend of 15c per share. Dividends are expected to remain constant. Shareholders' required rate of return is 12%.

(b) Gamma plc has just paid a dividend of 30c per share. Dividends are growing at the rate of 4% p.a. The shareholders' required rate of return is 15% p.a.

(c) Omega plc has just paid a dividend of 20c per share. It is intended that the dividend will remain at 20c for each of the next two years and thereafter will grow at 4% per year. The shareholders' required rate of return is 15% p.a. Use the 15% present value factors from the tables: year 1 0.870, year 2 0.756, year 3 0.658.