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Could you please explain how to get to right answer?
1)
“BETA is about to pay a dividend of $0.40 per share. Dividend are growing at the rate of 5% pa. The shareholders required rate of return is 20% pa. corporation tax is 25%. What is the current market value?” the answer is $3.20, but when I add all details to Po I couldn’t get to this number. I thought I can ignore tax, but even if I include this is still not right….
Can you help?2) Apple plc is thinking of acquiring Orange an unquoted building company. Orange currently paying a dividend of $0.2 per share and has a dividend cover of 3.2. Apple has found that quoted building companies have an average PE ratio of5. Which is the most sensible offer per share – $0.56, $1.80, $5.76, $6.13?
Thanks
1) Po = Do (1 + g) / (R – g)
Here, Do = $0.40; g = 0.05; and R = 0.20.
If you put these in the formula, you end up with Po = $2.80.
However, the formula gives an ex div value. Here, since they are about to pay a dividend of $0.40 we need the cum div value which is 2.80 + 0.40 = $3.20.2) The current earnings are 3.2 x $0.20 = $0.64.
Therefore a PE valuation give 5 x 0.64 = $3.20.
However, since this is an unquoted company you would expect to value at less than this. Of the choices available the most sensibly offer would be therefore $1.80 (although I do not think this is a very good question to be honest 🙂 )
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