(a) Outline and discuss the potential problems involved in using a dividend growth model to value equity. (b) Consider the following information for Trident plc. The current dividend per share is 10p. Shareholders require a return of 10% per annum. The dividend growth rate is assumed to be 25% for years 1-3 and 7% thereafter. What is Trident's current share price? (c) The Capital Asset Pricing Model (CAPM) has been put forward as an alternative to the Dividend Valuation Model in calculating a company's cost of equity capital. Why might the two models not provide the same estimate in practice?

(a) Outline and discuss the potential problems involved in using a dividend growth model to value equity. (b) Consider the following information for Trident plc. The current dividend per share is 10p. Shareholders require a return of 10% per annum. The dividend growth rate is assumed to be 25% for years 1-3 and 7% thereafter. What is Trident's current share price? (c) The Capital Asset Pricing Model (CAPM) has been put forward as an alternative to the Dividend Valuation Model in calculating a company's cost of equity capital. Why might the two models not provide the same estimate in practice?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 5MC

See similar textbooks

Similar questions

Consider the following security: Brous Metalworks Earnings Per Share, Time = 0 $2.00 Dividend Payout Rate 0.250 Return on Equity 0.150 Market Capitalization Rate 0.125 Required: Using the information in the tables above, please calculate the sustainable growth rate, dividends per share, and intrinsic value per share. Then solve for the present value of growth opportunities. (Use cells A5 to B8 from the given information to complete this question.) Brous Metalworks Sustainable Growth Rate Dividends per share (Next Year) Intrinsic Value No-Growth Value Per Share Present Value of Growth Opportunities (PVGO)
a. Determine average annual dividend growth rate over the past 5 years. Using that growth rate, what dividend would you expect the company to pay next year? b. Determine the net proceeds, N, that the firm will actually receive. c. Using the constant-growth valuation model, determine the required return on the company's stock, rg, which should equal the cost of retained earnings, r,. d. Using the constant-growth valuation model, determine the cost of new common stock, r,.
You obtain the following information about RIO: Estimated earnings growth rate: 11.00% Current Share Price: $25.00 EPS today: 1.71 You also have the following information about industry RIO is in: Estimated earnings growth rate: 11.00% Median P/E ratio: 19.90 Using the PEG approach and assume RIO has the same risk as the industry, is RIO’s equity value overvalued or undervalued compare to the industry?
To help them estimate the company's cost of capital, Smithco has hired you as a consultant. You have been provided with the following data: D1 = $1.45; P0 = $22.50; and gL = 6.50% (constant). Based on the dividend growth approach, what is the cost of common from reinvested earnings? Group of answer choices 12.94% 11.68% 12.30% 13.59% 11.10%
1. Using the Capital Asset Pricing Model (CAPM), what's this company's cost of common equity? ·Expected market return = 10% Risk-free rate = 4% Beta = 1.3
II. Common Stock Value- All growth models You are evaluating the potential purchase of a small business currently giving out dividend per share of P4.25. On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows: a. What is the firm's value of stock if expected to grow at an annual rate of 0% from now to infinity? b. What is the firm's value of stock if dividends are expected to grow at a constant rate of 8% from now to infinity? c. What is the firm's value of stock if dividends are expected to grow at an annual rate of 15% for the first 3 years, 12% for the next 2 years and followed by a constant annual rate of 8% from 6 years to infinity?
1. You have been asked to calculate the cost of equity using the Capital Asset Pricing Model (CAPM). The CFO estimates the Beta as 0.90. Management wants to use the 30 year bond rate as the risk free rate, arguing that Investors should make long term investments; that rate is 3% today. The expected return on the stock market as a whole has been estimated to be 7%, 10% and 12% by various studies. The CFO asks that you use an expected return of 9% for the average stock. The market risk Premium (RPM) will be 6%. 9% minus 3% = 6%. Calculate the cost of equity (Rs) using the CAPM. The formula is Rs = rRF + (RPM ) x β. Rs is the required return on equity or the Cost of Equity, rRF is the risk free rate, RP M is the required stock market return in excess of the risk free rate, and β , (Beta) is the stocks relative risk. β is also described as the estimate of the amount of risk that an individual stock contributes to a well balance portfolio. 2. The Discounted Cash…
Subject: Financial strategy & policy Question No 3 (part i) Answer the following. i) The future earnings, dividends, and common stock price of Nabeel Inc. are expected to grow 7% per year. Common stock currently sells for $23.00 per share; its last dividend was $2.00. a) Using the DCF approach, what is its cost of common equity? b) If the firm’s beta is 1.6, the risk-free rate is 9%, and the average return on the market is 13%, what will be the firm’s cost of common equity using the CAPM approach? c) If the firm’s bonds earn a return of 12%, based on the bond-yield-plus-risk-premium approach, what will be rs? d) If you have equal confidence in the inputs used for the three approaches, what is your estimate of cost of common equity?
Blue is currently selling for $26 per share. Its next dividend (in one year) is forecasted to be $1. Immediately after the dividend is paid, you expect the price to be $33. a. What is its expected dividend yield? b. What is its expected capital gain rate? c. What is the equity investors' expected return? Question content area bottom Part 1 a. Dividend yield: enter your response here%. (Round to two decimal places.) b. Capital gain rate: enter your response here%. (Round to two decimal places.) c. Expected Return: enter your response here%. (Round to two decimal places.)
For Company ABC, if stock price P0 = $30; dividend paid at the end of period 1 D1 = $3.00; growth rate g = 5%; What’s the required rate of return for equity holder rs = ? If the flotation cost F = 10%; What’s the required rate of return for equity holder rs = ?
You have assigned the following values to these three firms: 1 2 3 4 A Ester Lauder Kimbo Realty Nordstream Ester Lauder Kimbo Realty Nordstream B D Expected Current Dividend Price $ 1.70 $50.00 Growth Estimate 16.50% $ 1.68 $ 82.00 11.00% $ 0.60 $10.00 13.00% Assume that the market portfolio will earn 15.50 percent and the risk-free rate is 6.40 percent. Compute the required return for each company using both CAPM and the constant-growth model. Note: Do not round intermediate calculations and round your final answers to 2 decimal places. Required return - Required return CGM CAPM % % % E % % % Beta 0.74 1.51 1.02
Assuming yourself to be Anna, narrate what you would have read in the file. Your narrative should include answers to the following: Note: 1 Retention ratio = 1 – Dividend payout ratio a) Does the fact that Chatterbox will allow only a 70% payout from the next period, allows it to grow? If so, what will be the growth rate if the firm successfully meets the investor expectation about the return on equity.