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Question 2abc
Chad Co is a stock-market-listed company which has managed to increase earnings over the last year. As a result, the board of directors has increased the dividend payout ratio from 40·0% for the year to March 2014 to 41·4% for the year to March 2015. Chad Co has a cost of equity of 12·5%. The following information is also available:
| Year to March | 2014 $000 | 2015 $000 |
|---|---|---|
| Earnings | 13,200 | 13,840 |
| Ordinary shares | 8,000 | 8,000 |
The nominal value of the ordinary shares of Chad Co is $0·50 per share. Listed companies similar to Chad Co have an earnings yield of 8·2%.
Required:
(a) Calculate the equity market value of Chad Co using the dividend growth model. (3 marks)
(b) Calculate the equity market value of Chad Co using the earnings yield method. (2 marks)
(c) Discuss the relative merits of the dividend growth model and the earnings yield method as a way of valuing Chad Co. (5 marks)