- 7 Marks
FM – L2 – Q14 – Business valuations
Calculate expected share price using dividend valuation model with constant dividends of GH₵0.24 in perpetuity.
Question
Kofi Enterprises has shareholders expecting an 8% annual return. The company paid dividends of GH₵0.24 per share in the year just ended.
Required:
(A). Assume that Kofi Enterprises pays out all of its annual profits as dividends, and the annual dividend per share is expected to be GH₵0.24 in perpetuity. Using the dividend valuation model, suggest what the expected share price of the company should be.
(B). Assume that the expected annual rate of growth in dividends is expected to be 3%. Using the dividend growth valuation model, suggest what the expected share price of the company should be.
(C). Assume that Kofi Enterprises is expected to retain 60% of its profits and reinvest the money to earn an annual return of 9%. Using the dividend growth valuation model (the Gordon growth model), suggest what the expected share price of the company should be.
Find Related Questions by Tags, levels, etc.
- Tags: Business valuations, dividend valuation, Perpetuity, share price
- Level: Level 2
- Topic: Business valuations
