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While calculating issue price using dividend valuation model, do we use Dividend growth rate or Earnings growth rate?
Because I came across a question which has given both the rates but are different
The dividend growth rate. (However, in the long-term the two growth rates would have to be the same.)
Better to tell me which question you are referring to (assuming that it is a past exam question).
Have you watched my free lectures on the valuation of securities? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Its not a past exam question, however this question is in Kaplan Exam kit.
Loki plc is a growing company specialising in making accessories for mobile phones and
tablets. The company is currently all-equity financed with 2 million ordinary shares in issue.
The existing shareholders are mainly family members and friends. The directors of Loki
need to raise finance to fund a new factory and are considering a range of options including
flotation and venture capital. Future growth is anticipated to be the following:
Earnings next year = $0.25m, expected to grow at 7% pa
Dividend next year = $0.14m, expected to grow at 4% pa(c) Calculate the issue price of Loki shares to the nearest cent using the dividend
valuation model with a cost of equity of 14%.
A $0.60
B $0.70
C $1.19
D $1.24Answer – B
Thank you, Sir. Understood very well.
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