Page 310 - FM Integrated WorkBook STUDENT 2018-19

Chapter 17

2.2 DVM with dividend growth at a fixed rate

D 0 (1 + g) D 1
r e = –––––––––– + g = ––– + g
P 0 P 0

Dₒ = current dividend

D 1 = dividend in 1 year’s time

g = constant rate of growth in dividends

Question 3

DVM with growth

Bishop Co has just paid out a dividend of $0.45 per share and expects
dividends to grow at a rate of 3% per annum for the foreseeable future. Bishop
Co’s current share price is $3.50 per share.

Calculate the cost of equity using the dividend valuation model.

Ke = [D 0 (1 + g)/P 0] + g

Ke = [$0.45 × 1.03/$3.50] + 0.03 = 0.162 or 16.2%

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