Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Cost of Equity

- This topic has 7 replies, 3 voices, and was last updated 2 months ago by John Moffat.

- AuthorPosts
- May 31, 2022 at 3:37 am #656921
IPA Co is about to pay a 0.50 dividend on each ordinary share. Its earnings per share was $ 1.50. Net assets per share is $6. Current share price is $4.50 per share.

What is the cost of equity?

I dont know how to find retention rate using formula g = br .

May 31, 2022 at 8:10 am #656933If the earnings are $1.50 and the dividend is $0.50, then they are retaining $1.00 of every $1.50 of earnings. Therefore the retention rate is 1/1.50 = 67%.

Have you not watched my free lectures on this? 🙂

June 1, 2022 at 7:25 pm #657095I already watch sir but this one question is really hard.

6

QPR Co has 10 million $0.60 par value shares in issue. It generated free cash flow of

$1.6 million this year and expects this figure to grow by 6% per annum in the future.QPR Co has a WACC of 10%. It has $600,000 of bonds in issue, trading at $60 per $100.

Calculate the estimated value of a QPR Co share to the nearest cent.

A $1.66 B $1.70C $4.20 D $4.24

The question wants to find Po but its complicated. Can you help me

June 2, 2022 at 8:52 am #657114You must surely have an answer in the same book in which you found the question, so in future ask about whatever it is in the answer that you are not clear about and then I will explain.

The total value of the firm (equity plus debt) is the PV of $1.6m per year discounted at the WACC of 10% (and because it is a growing perpetuity you use the dividend valuation formula to get the PV.

You know the total market value of the debt, so subtracting that from the total market value of the firm gives the total market value of the equity. Dividing this by the number of shares gives the MV per share,

June 2, 2022 at 5:14 pm #657156I’m sorry this is my friend’s question so I dont know the answer.

June 3, 2022 at 7:25 am #657183Well I have told you how to calculate it (and the answer is $4.20).

However it is pointless to attempt questions for which you do not have an answer. You should be using a Revision Kit from one of the ACCA Approved Publishers. It has questions and answers (together with workings).

November 21, 2022 at 7:52 pm #671998Hi, I am confused on the top one also. I’ve worked out the growth rate and got to the final formula which I think should be:

re = (Do (1+g)/ Po) + g

so: 0.5 x 1.167/4.5 + 0.167 = 29.67%

but the answer has it as: 0.5 x 1.167 / (4.50 – 0.50) + 0.167 = 31.3%

How was I supposed to know to deduct the dividend?

November 22, 2022 at 8:29 am #672034Because the question says that they are about to pay a dividend. Therefore the MV given is cum div, but we need the ex div MV for the formula.

I do explain this in my free lectures!!

- AuthorPosts

- You must be logged in to reply to this topic.