ACCA Applied Skills · Financial Management · Models for the valuation of shares
Kappa Co has just paid a dividend of $0.40 per share. Dividends are expected to grow at 5% a year indefinitely. Kappa's cost of equity is 13%. What is the ex-div market value per share using the dividend valuation model?
The share value is $5.25. The next dividend is $0.40 x 1.05 = $0.42, and dividing by the cost of equity less growth (13% - 5% = 8%) gives $5.25. Using the dividend just paid without growing it would wrongly give $5.00.
- A$3.08
- B$5.00
- C$5.25Correct
- D$3.23
Explanation
P0 = D0(1+g)/(ke-g) = 0.40 x 1.05 / (0.13 - 0.05) = 0.42 / 0.08 = $5.25. Using D0 without growing it gives 0.40/0.08 = $5.00, which is the key error. Dividing by ke alone gives $3.08.
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