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Hello!
I had a doubt regarding part d) i.e. Evaluation of argument that Anchorage may have been undervalued by the market.
I understood why they had capitalised current dividend payments of $270m to arrive at a market capitalisation of $4049m using cost of equity at 6.668%. However what I don’t understand is why haven’t they assumed that the dividend will grow over the years at the rate of 4% as per the dividend growth model.
Could it be due to the growth expectations of the company being minimal or unlikely?
In theory the market value of the shares should be determined using the dividend growth model incorporating the shareholders expectations of dividend growth. What the answer is trying to say is that the actual market value (which we know) is little different from what the market value should be if they expected there to be no growth. This suggests that despite average growth in firms in the index being 4%, it appears that shareholders in this company are expect little to no growth in the dividends in this company. If that is what they are expecting (whether rightly or wrongly) then they should be happy to accept in fairly low value.
(Incidentally, I hope that you are looking at this question in a Revision Kit rather than in the actual exam paper. The reason is that the original exam question including calculations of the EVA. However EVA is no longer in the syllabus, and so in Revision Kits the question has been amended to remove asking for the EVA 🙂 )
So say in a hypothetical situation if Anchorage Retail had good future prospects and a tremendous amount of growth was expected, then can I use the dividend growth model to calculate the market capitalisation of the company? As in can I include the growth rate in the calculations?
No I found this question in the revision kit 🙂
Thanks Mr. Moffat!
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