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sir, question is to calculate current cost of equity and using this value calculate the value of the company using the dividend valuation model.
Ke can be calculated using CAPM and i got it as 12% but i am stuck with growth of dividends for calculating the value of the company, its given like:
year earnings($000) dividends($000)
1 3000 nil
2 3600 500
3 4300 1000
how can i calculate growth of dividends in this case?The question specifically says that they expect future dividends to increase after year 3 at 3% per year, and since we already know what the dividends will be in years 1, 2 and 3, growth is irrelevant as far as these are concerned. It is only the growth after year 3 that is of concern, and you are given that.
You really should watch my free lectures on the valuation of equity, because I explain (with examples) how we do it, including how to deal with examples such as this.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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