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ACCA FM · Guided practice (Show me how)

Chapter 17: The cost of capital

Cost of equity - the dividend growth model and estimating growth

Three companies from the notes (chapter 17). 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.

  1. (a) T plc: cost of equity

    Calculate T plc's annual cost of equity for the period shown.

  2. (b) X plc: growth from past dividends

    Calculate X plc's average dividend growth rate over the years shown.

  3. (c) Z plc: growth from retentions

    Calculate Z plc's dividend growth rate, cost of equity and share price in two years.

Opening this exercise…