This question asked candidates to calculate the cost of equity using the dividend growth model (DGM). Many answers gained full marks.

Firstly, candidates had to calculate a dividend growth rate. Possible values were the geometric mean historical dividend growth rate (4.0%) and the arithmetic mean historical dividend growth rate (4.0%) over the three-year period, and the most recent annual historical dividend growth rate (4.9%) for 2013. Some candidates wrongly used a four-year rather than a three-year period.

Secondly, candidates had to use the DGM to calculate the cost of equity. This called for the most current dividend per share, the current ex dividend share price and the forecast dividend growth rate. Many candidates gained full marks here, although some candidates got caught up in re-arranging the DGM and some candidates omitted “+g” from Ke = [D0 x (1 + g)/P0] + g.