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Question Number 7 in the Dec 2014 MCQ section. Could you please explain the method the examiner followed? The examiner calcluated Joint probabilites which I am not aware of. Is it important? Here is the question below
Question
An investment project has a cost of $12,000, payable at the start of the first year of operation. The possible future
cash flows arising from the investment project have the following present values and associated probabilities:
PV of PV of
Year 1 cash flow ($) Probability Year 2 cash flow ($) Probability
16,000 0·15 20,000 0·75
12,000 0·60 (2,000) 0·25
(4,000) 0·25If you go to the link “Revision Kit live” from the main Paper F9 page, you will find lectures working through, and explaining, all of the questions in the December 2014 exam (including this one 🙂 )
Hi John,
Tried to find an old thread regarding F9 Dec 2014 multiple choice question 19, but was not successful. So here goes:
This is the question:
A company has just paid an ordinary share dividend of 32.0c and is expected to pay a dividend of 33.6c in one year’s time. The company has a cost of equity of 13%. What is the market price of the company’s shares on an ex div basis?My answer:
1. found growth rate of 5% (33.6-32)32
2. Po = Do(1+g) / (Re-g)
= 33.6(1+.05) / (0.13-.0.05)
= 4.41Answer is (D) = 4.20
Dividend growth rate = 5%
MV = 33.6/(0.13-0.05) = 4.20Why was the growth rate omitted from the numerator in the formula?
Thanks
looking at it again, I get 4.20 if I use this year’s share dividend of 32c in the answer rather than the 33.6c, which probably makes more sense since we require the current market price of the shares.
If my understanding is correct, why does the past paper answer use the 33.6c?
Do in the formula is always the current dividend that has just been paid, which is 32c.
Do(1+g) is therefore 32 x 1.05 = 33.6
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