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ajt co gearing ratio 3 % tax 25% ajt has asset beta (ungear) 1.2 risk free rate 5% market return 12%
what is the cost of equity ?The gearing ratio in the question is 30% (debt:debt + equity). So for every 30 debt, there is 70 equity.
Using the asset beta formula,
1.2 = (70 / (70 + (0.75 x 30)) x beta equity.Beta equity = 92.5/70 x 1.2 = 1.5857
In the CAPM formula, cost of equity = 5% + 1.5857 (12 – 5) = 16.10%
dividend paid 40 cent expected growth 5% shareholder return 20%
what is cirrent market value of share?
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use the dividend growth formula
div(1+g) / (Ke – g)
div is 40
g is 5%
Ke is 20%therefore 40(1+0.05) / (0.2 – 0.05)
42 / 0.15 = 280 cent or $2.80Thank you Aleksanders (although please answer only in the general F9 Forum – this forum is Ask the Tutor, and you are not the tutor 🙂 )
Sonia: the question in the test actually says that the dividend is about to be paid. Therefore we need the cum div market value. The formula gives the ex div value, and so for the cum div value we need to add the dividend about to be paid.
So the answer is $2.80 + $0.40 = $3.20
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