ACCA Applied Skills · Financial Management · Nature and purpose of the valuation of business and financial assets
Marlow Co has just paid a dividend of $0.40 per share. Dividends are expected to grow at a constant 5% a year indefinitely, and the cost of equity is 13%. Using the dividend valuation model, what is the ex-div market value per share?
The ex-div value is $5.25 per share. The dividend valuation model needs next year's dividend of $0.42 (0.40 x 1.05), which is divided by the difference between cost of equity and growth, 8%. Using the current dividend gives $5.00 and is incorrect.
- A$3.00
- B$3.15Correct
- C$5.25
- D$5.00
Explanation
The model uses next year's dividend: D1 = 0.40 x 1.05 = $0.42. Value = D1 / (ke - g) = 0.42 / (0.13 - 0.05) = 0.42 / 0.08 = $5.25. Using the current dividend of 0.40 without growth gives $5.00, which is wrong because D0 must be grown to D1. Dividing 0.42 by 0.14 gives $3.00, which wrongly adds g to ke.
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