Page 509 - FM Integrated WorkBook STUDENT 2018-19

Answers

Question 5

DVM with growth

Boop Co is about to pay a dividend of 18 cents per share and its current share
price is $2.40. Shareholders expect dividends to grow at a constant rate of 5%
per annum.

Calculate the cost of equity of Boop Co.

Ex div share price for use in DVM = $2.40 – $0.18 = $2.22

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

Ke = [$0.18 × 1.05/$2.22] + 0.05 = 0.135 or 13.5%

Question 6

Estimating growth using past dividends

A company’s dividend just paid was $0.63 per share. 6 years ago the dividend
was $0.50 per share.

Estimate the annual growth rate in dividends.

1/n
g = (D 0/D n) – 1
1/6
g = ($0.63/$0.50) – 1

g = 0.039 or 3.9%

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