Page 508 - FM Integrated WorkBook STUDENT 2018-19

Chapter 21

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%

Question 4

DVM with growth

Gorman Co expects to pay out a dividend next year of 50 cents. Its current
share price is $5.20 and it expects annual dividends to grow after next year’s
payment at a constant rate of 2%.

Calculate the cost of equity using the dividend valuation model.

Ke = [D 1/P 0] + g

Ke = [$0.50/$5.20] + 0.02 = 0.116 or 11.6%

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