Page 507 - FM Integrated WorkBook STUDENT 2018-19

Answers

Chapter 17

Question 1

DVM no growth

KLF Co has paid a dividend of $0.25 per share for many years and expects to
continue paying out at this level for the foreseeable future. The company’s
current share price is $2.45.

Calculate the cost of equity using the dividend valuation model.

Ke = D/P 0

Ke = $0.25/$2.45 = 0.102 or 10.2%

Question 2

Cum div vs ex div

The current share price of a company is $3.65 and a dividend of 15 cents is just
about to be paid.

Calculate the ex div share price, P 0.

Ex div = cum div – dividend

Ex div = $3.65 – $0.15 = $3.50 per share.

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