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FM – Chapter 15: The valuation of securities – Equity

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › FM – Chapter 15: The valuation of securities – Equity

  • This topic has 4 replies, 2 voices, and was last updated 2 weeks ago by LMR1006.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • July 2, 2025 at 9:55 am #718135
    Thinkingoutloud
    Participant
    • Topics: 3
    • Replies: 3
    • ☆

    Hi John,

    Example 7. “Omega plc has just paid a dividend of 20c per share. It is intended that the dividend will remain at 20c for each of the next 2 years and thereafter will grow at 4% per year. The shareholders required rate of return is 15% p.a.”

    What if, dividends grew at 4% for the first 2 years and then remained constant thereafter. Please could you solve this?

    Kind Regards.

    July 2, 2025 at 10:49 am #718137
    Thinkingoutloud
    Participant
    • Topics: 3
    • Replies: 3
    • ☆

    Sorry, a small edit. Remain constant at 40c thereafter.

    July 2, 2025 at 11:23 pm #718139
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1518
    • ☆☆☆☆☆

    Div for the first two years:
    Yr 1 = 20c

    Yr 2 = 20c * 1.04 so is 20.8c

    PV Y1= 20c / (1 + 0.15)^1
    = 20c / 1.15
    = 17.39c

    Y2 = 20.8c / (1 + 0.15)^2
    = 20.8c / 1.3225 = 15.71c

    PV of constant dividend of 40c starting from Year 3:
    Perpetuity formula
    = 40c / 0.15
    = 266.67c (This is the value at Year 2)

    Now, we need to discount this back to present value:
    = 266.67c / 1.3225
    = 201.01c

    PV value per share

    = 17.39c + 15.71c + 201.01c = 234.11c

    July 3, 2025 at 2:59 pm #718144
    Thinkingoutloud
    Participant
    • Topics: 3
    • Replies: 3
    • ☆

    Thank you for this.

    July 4, 2025 at 11:56 pm #718150
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1518
    • ☆☆☆☆☆

    You are most welcome

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