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A company has 4 million shares in issue with a nominal value of $0.50 per share. A dividend of 24 cents per share has just been paid. Four years ago, the dividend was 20.51 cents per share.
The beta of shares in the company is 0.5. The risk free rate is 3% and the market premium is 8%.What is the market capitalisation of the company?
I’m getting $66,560,000 as the answer but its wrong. Pls show me the workings to arrive at the answer $33,280,000….
You have obviously arrived at the correct market value per share (which is $8.32)
There are 4 million shares, and therefore the market capitalisation is 4M x $8.32 = $33.28M
Still do not understand, I also arrive at 66.56m. Which rate should we use for Ke (Cost for equity capital) and why?
Thanks!
The cost of equity is 3% + (0.5 x 8%) = 7%, using the CAPM formula.
The dividend growth rate is ((fourth root of 24/20.51) – 1) = 0.04 (4%)
Using the dividend valuation formula, the MV per share = (24 x 1.04) / (0.07 – 0.04)
= 832c or $8.32.As I wrote before, 4M x 8.32 = 33.28M
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