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Business Valuation – Value of shares question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Business Valuation – Value of shares question

  • This topic has 3 replies, 2 voices, and was last updated 2 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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    Posts
  • August 18, 2023 at 2:36 pm #690165
    zainsherazi1
    Participant
    • Topics: 3
    • Replies: 1
    • ☆

    Question 6:
    A company has paid an annual dividend of $0.86 per share. Dividends are expected to grow by 3% per annum for next three years and by 5% per annum onwards for the foreseeable future. Company’s cost of equity is 12%. What is the current market value of ordinary shares?

    I got answer of 12.15$ through this method, pls check if its correct.

    Step1: Calculate dividends for 3 years by compounding it by 3%
    Step 2: Calculate MV of shares in 3 years time, using dividend value of dividend at end of year 3, g is 5% and Ke of 12
    Step3: Discount the cash flows at 12% to get present value, which is our market value.

    August 18, 2023 at 5:05 pm #690173
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54764
    • ☆☆☆☆☆

    I have no idea where you found this question, but surely there is an answer to it in the same book?

    The steps you have listed are completely correct (but I do not have the time to check the final answer 🙂 )

    August 18, 2023 at 5:54 pm #690180
    zainsherazi1
    Participant
    • Topics: 3
    • Replies: 1
    • ☆

    I found this question from online notes while I was searching for your lecture on this topic. The notes did not had an answer, but if the steps are correct I believe the answer would be correct as well. Thanks for clearly explaining this concept

    August 19, 2023 at 8:51 am #690243
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54764
    • ☆☆☆☆☆

    You are welcome 🙂

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