Question 4b
Examiners Report

The requirement here was to calculate the total equity market value of a company using the dividend growth model (DGM) and then to discuss why this value might differ from the current equity market value.

While most candidates were able to calculate the historic dividend growth rate, some candidates experienced difficulty in using the DGM. As discussed in previous examiner reports, some candidates wrote out the DGM in a format for calculating the cost of equity, and then either calculated a cost of equity (although the value of this was given in the question) or tried to rearrange the formula having inserted values for all variables other than the equity market value. Both approaches are surprising because the growth model is given in the formulae sheet.

Some candidates got into difficulties with magnitudes, e.g. calculating the total equity market value in millions of dollars using the DGM and then multiplying this value by the total number of shares as though it were in dollars per share.

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