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OK I’m looking at a question in the exam kit for Kaplan it asks me to work out the MV of the company. Im given the following information:
Dividend just paid $50m
Earnings retained and invested 70%
Retrun on investments 15%
Cost of equity 25%I’ve got the Kaplan complete text in front of me and even looking at the back of the exam kit for the answer I can’t work out how i’m supposed to do it, and i can’t find anything similar in the business valuations chapter.
Could you please point me towards the lecture that will cover this particular aspect of business valuation, or tell me what I’m overlooking?
Since there is no mention of any debt finance, the MV of the company will be the MV of the equity.
You use the dividend valuation formula given on the formula sheet. To calculate the dividend growth rate, you use the rb formula.
All of this is explained in my free lectures on Chapter 15 of the free lecture notes.
My workings:
G= br
>> Roi=15%*70%=105 ie 10.5%
therefore g= 10.5%cost of eqty=25%
Po= do(1+g)/r-g
=50(1+105)/0.25-0.105
= 55.25/0.145=381.034therefore mv= $3.81 per share
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