Page 244 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 10

Example 4

Target has just paid a dividend of EUR250,000. It has 2 million shares in
issue.

The current return to shareholders in the same industry as Target is 12%,
although it is expected that an additional risk premium of 2% will be applicable
to Target, being a smaller and unlisted company.

Required:

Calculate the expected valuation of Target, if

(a) dividends are expected to be constant

(b) dividends are expected to grow at 4% per annum.

Solution

(a) P o = 250,000/0.14

= EUR 1.786 million, or 1.786/2 = EUR 0.893 per share.

(b) P o = (250,000 × 1.04)/(0.14 – 0.04)

= EUR 2.6 million, or 2.6/2 = EUR 1.30 per share.

236