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Hello again sir – sorry for the second post.
Dartig (Dec 2008, part c of question). The mark scheme says that the revised share price (based on the business expansion), relative to the TERP, is one year apart. Is this because we calculated a year’s worth of EPS growth, based on the estimated effects of the expansion, and then multiplied by the PER?
Will any of the section C questions require company valuation calculations? I can recall TERP related questions in Business Finance questions, in section C, but was wondering if it is likely that business valuation questions may appear within Business Finance or Investment Appraisal topics, the way that TERP does in the Business Finance questions.
In Close Co, December 2011, we had to use the earnings yield method, incorporating the expected growth, to calculate the company value and so I subtracted the expected growth from the earnings yield ratio and then divided PAT (multiplied by 1 + growth rate) by the (earnings yield ratio – expected growth). If a question asks to calculate the market value of the company using the dividend yield method specifically, and then we’re asked to incorporate expected growth, would we use the exact same approach?
Thank you.
Section C could certainly include valuation questions.
With regard to the question Close, strictly the use of earnings yield should not include the growth (and neither should using the dividend yield method). The examiner recognised this and gave full marks whether or not growth was included.
Strictly, growth should only be taken into account when using the dividend valuation method.
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