Dividend Valuation Model 3 / 7

Specimen
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MC Question 10

SKV Co has paid the following dividends per share in recent years:
Year 20X4 20X3 20X2 20X1
Dividend ($ per share) 0·360 0·338 0·328 0·311
The dividend for 20X4 has just been paid and SKV Co has a cost of equity of 12%.

Using the geometric average historical dividend growth rate and the dividend growth model, what is the market price of SKV Co shares on an ex dividend basis?

A. $4·67
B. $5·14
C. $5·40
D. $6·97

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Sample
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Question 3b

Darlga Co is partly financed by 7% loan notes which are redeemable at their nominal value of $1,000 per loan note in eight years’ time. Alternatively, the loan notes are convertible after seven years into 110 ordinary shares of Darlga Co per loan note. The ordinary shares of Darlga Co are currently trading at $6·50 per share on an ex dividend basis. The current cost of debt of the convertible loan notes is 8%.

Required:
(b) Discuss the limitations of the dividend growth model as a way of valuing the ordinary shares of a company. (4 marks)

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MC Question 3

The following information relates to a company:
Year 0 1 2 3
Earnings per share (cents) 30·0 31·8 33·9 35·7
Dividends per share (cents) 13·0 13·2 13·3 15·0
Share price at start of year ($) 1·95 1·98 2·01 2·25

Which of the following statements is correct?

A. The dividend payout ratio is greater than 40% in every year in the period
B. Mean growth in dividends per share over the period is 4%
C. Total shareholder return for the third year is 26%
D. Mean growth in earnings per share over the period is 6% per year

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MC Question 19

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. $4·20

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Specimen
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MC Question 14

SKV Co has paid the following dividends per share in recent years:
Year 2013 2012 2011 2010
Dividend (cents per share) 36·0 33·8 32·8 31·1
The dividend for 2013 has just been paid and SKV Co has a cost of equity of 12%.

Using the geometric average historical dividend growth rate and the dividend growth model, what is the market price of SKV Co shares to the nearest cent on an ex dividend basis?

A. $4·67
B. $5·14
C. $5·40
D. $6·97

Reveal answer