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Hello,
when i worked the question below I got 4.41 but looking at the answers on ACCA.s website, the correct answer is 4.2. it was calculated as d/r-g and not d(1+g)/r-g. Please explain why.
Thank you, Sir.
A company has just paid an ordinary share dividend of 32·0 cents and is expected to pay a dividend of 33·6 cents
in one year’s time. The company has a cost of equity of 13%.
What is the market price of the company’s shares to the nearest cent on an ex dividend basis?
A $3·20
B $4·41
C $2·59
D $4·20In the formula Do(1+g)/(Re-g), then Do is the current dividend (here 32.0)
Do(1+g) is the dividend in 1 years time (33.6).You will get the same answer if you use the formula as it is written and have (32.0 x 1.05) on the top of the equation, or whether you just have 33.6 on the top instead.
You really should watch the free lectures on the valuation of securities where all this is explained (and all of the lectures – they are a complete course covering the whole syllabus).
Also, lectures have been uploaded where I work through every question from the December 2014 exam – both the Section A and the Section B questions, explaining all of the answers.
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