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Constant dividend or fixed growth in dividend?

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Constant dividend or fixed growth in dividend?

  • This topic has 1 reply, 2 voices, and was last updated 6 months ago by LMR1006.
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  • December 5, 2024 at 12:04 pm #713915
    aamna808
    Participant
    • Topics: 24
    • Replies: 9
    • ☆

    Carp Co has announced that it will pay an annual dividend equal to 55% of earnings. Its earnings per share is $0.80, and it has ten million shares in issue. The return on equity of Carp Co is 20% and its current cum dividend share price is $4.60.

    What is the cost of equity of Carp Co?

    I don’t understand as to why we have to calculate a growth rate for dividends and use DVM for fixed growth in dividends formula when nothing about growth is really mentioned? I calculated the correct dividend per share value and decided to use that as my figure in the constant dividend formula. Also, is the return on equity ROE or treated as cost of equity i.e. the Ke? I am so confused, please let me know. Thank you!

    December 5, 2024 at 4:18 pm #713935
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1497
    • ☆☆☆☆☆

    The return on equity (ROE) is not treated as the cost of equity directly; rather, it is used to estimate the growth rate of dividends when calculating Ke.

    The growth rate is essential for applying the DVM, even if it is not explicitly mentioned in the problem.

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