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- October 28, 2019 at 12:45 pm #551082AnonymousInactive
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A question in the BPP FM revision text has a CBE-style 2-mark question:
A company recently paid a dividend of $0.50. This is $0.10 more than 3 years ago. Required rate of return is 10%. Using the dividend valuation model and assuming recent dividend growth is expected to continue, what is the current value of a share, to 2 decimal places?
Using formulas in Excel gives $23.64.
The ‘correct’ answer was $23.41.
The difference is because in the workings shown in the text the growth rate (g) was rounded to 0.077 (7.7%). However, the result from the Excel formula is more accurate because it doesn’t round until the end. In fact rounding g, but to anything other than 3 decimal places, will lead to a different answer.
As there was only a box to enter a value rather than a multiple choice, and as it is computer marked, would it be marked wrong even if it is out by a very small amount? Should I remember to use only x.x% for all percentages within calculations? The format seems inconsistent with the fact that it is a CBE.
October 28, 2019 at 2:44 pm #551089Firstly you will not be able to use excel for the 2 mark questions (only for the Section C questions).
However, rounding difference can still occur in the Section A and B questions and so in the real exam the computer is programmed to accept a range of answers so as to avoid this problem.
October 31, 2019 at 8:28 pm #551308AnonymousInactive- Topics: 8
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Thank you.
November 1, 2019 at 9:18 am #551349You are welcome 🙂
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