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A company has 4 million shares in issue with a nominal value of $0.50 per share. A dividend of 24 cents per share has just been paid. Four years ago, the dividend was 20.51 cents per share.
the beta of shares in the company is 0.5. The risk free rate is 3% and the market premium is 8%.what is the capitalisation of the company?
A) $16,640,000
B) $28,447,883
C) $66,560,000
D) $33,280,000
(Please sir solve this problem)
Dividend growth rate = 4th root of (24/20.51) – 1 = 0.04 (or 4%) per year.
Shareholders required rate of return = 3% + (0.5 x 8%) = 7%
So MV = 24 x 1.04 / (0.07 – 0.04) = 8.32 per share.
For the market capitalisation, multiply by the number of shares.
Hi John,
Just to clarify one other thing. If in the question it says: the dividend is about to be paid would we take this as D1 when using the dividend growth model? And if it has just been paid is it the D0?Thanks
No – you really should watch the lectures.
Whether the dividend has just been paid or is about to be paid, it is still Do.
Po using the formula is always the ex div value which assumes the current dividend has just been paid. If (unlikely) you were asked for the cum div value – the value if the current dividend is about to be paid – then you simply add on the current dividend to Po from the formula.
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