This part of question 4 asked for a calculation of the current cost of equity of Corhig Co, and an estimate of the value of the company using the dividend valuation model.

Most answers correctly calculated the current cost of equity using the capital asset pricing model, although some answers confused the equity risk premium of 5% given in the question with the return on the market.

Most answers struggled to use the dividend valuation model to value the company. Simply put, the dividend valuation model holds that the value of a company is equal to the present value of its future dividend. Most answers limited their valuation attempt to using the dividend growth model, ignoring the dividend expected in year 2.

The dividend growth model can be used to provide a year 3 present value of the dividend stream expected after year 3. This year 2 present value then needed to be discounted back to year 0, and added to the present values of the dividend from years 2 and 3, to give the value of the company.

A useful point to remember with questions such as this, is that it is essential to pin down the amount and the timing of future cash flows when calculating present values.