Question 2a
You will get this Formula Table at the exam so learn well how to apply it in your FM (F9) Exam
Card Co has in issue 8 million shares with an ex dividend market value of $7·16 per share. A dividend of 62 cents per share for 2013 has just been paid. The pattern of recent dividends is as follows:
Year | 2010 | 2011 | 2012 | 2013 |
---|---|---|---|---|
Dividends per share (cents) | 55.1 | 57.9 | 59.1 | 62.0 |
Card Co also has in issue 8•5% bonds redeemable in five years’ time with a total nominal value of $5 million. The market value of each $100 bond is $103•42. Redemption will be at nominal value.
Card Co is planning to invest a significant amount of money into a joint venture in a new business area. It has identified a proxy company with a similar business risk to the joint venture. The proxy company has an equity beta of 1•038 and is financed 75% by equity and 25% by debt, on a market value basis.
The current risk-free rate of return is 4% and the average equity risk premium is 5%. Card Co pays profit tax at a rate of 30% per year and has an equity beta of 1•6.
Required:
Calculate the cost of equity of Card Co using the dividend growth model. (3 marks)