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March CO

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › March CO

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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    Posts
  • October 19, 2021 at 1:43 pm #638489
    Katrin
    Member
    • Topics: 1
    • Replies: 1
    • ☆

    Hi Tutors,

    I am confused on the calculation of the cost of equity from the below question:

    March Co operates and manages a number of theme parks. The capital structure of March
    Co as at 1st January 2016 is as follows:

    Issued ordinary shares (25c shares) 250m
    The ordinary shares have a current market price of $2 each. Dividends per share (in cents)
    in the five preceding years were as follows:
    2011 2012 2013 2014 2015
    6.9 7.2 8.8 9.6 10.5
    The ordinary dividend for 2015 has just been paid.

    Growth of dividends: 0.11
    Cost of equity: (10.5*1.11/200)+0.11=16.83%
    Why do they divide by 200?

    Many thanks

    October 19, 2021 at 4:53 pm #638524
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51576
    • ☆☆☆☆☆

    Because the formula state to divide by the market value.

    Given that the dividend is included in cents (10.5) the market value should be stated in cents also, and a market value of $2 is 200 cents. (If you prefer show them both in $’s (so 0.105 and 2) and you get the same answer.)

    Have you not watched my free lectures on 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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