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Sir, In question no. 34 (Froste co.) of the full specimen exam,
(Link to the question: https://www.accaglobal.com/middle-east/en/student/exam-support-resources/fundamentals-exams-study-resources/f9/cbe-specimen-exams.html#)
In part (i) I have calculated the growth rate using gordon’s model as:
60%*12.4% and got the answer as 7.44% but in the answer key, it says 4% can you please explain me how?According to the question, the current dividend is 0.50 and the expected dividend in 1 years time is 0.52.
So they are expecting dividend growth to be (0.52 – 0.50) / 0.50 = 4%Despite the symbols in the formula given for Gordon’s growth approximation, Re is the return on re-investment. This is not given in the question and you cannot assume it to be equal to the cost of equity. I explain how the formula works in my free lectures.
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