Question 3(a)

Most candidates were able to calculate correctly the value of the company using the dividend growth model. Some answers wasted time calculating the value per share, but the question did not ask for this, rather it asked for the value of the company.

Question 3(b) 
This part of question 3 asked for a discussion of the dividend growth model as a way of valuing a company and its shares. Candidates were not asked to discuss the dividend growth model as a way of calculating the cost of equity, so comparisons with the capital asset pricing model did not gain any credit.

Most answers were able to discuss the weakness of the assumptions underlying the dividend growth model as regards the future dividend growth rate and the future cost of equity. Weaker answers talked about subjectivity, or about how estimates of values could be wrong, or offered only a list of points, with little or no discussion.