MC Question 24
Ring Co has in issue ordinary shares with a nominal value of $0·25 per share. These shares are traded on an efficient capital market. It is now 20X6 and the company has just paid a dividend of $0·450 per share. Recent dividends of the company are as follows:
| Year | 20X6 | 20X5 | 20X4 | 20X3 | 20X2 |
|---|---|---|---|---|---|
| Dividend per share | $0·450 | $0·428 | $0·408 | $0·389 | $0·370 |
Ring Co also has in issue loan notes which are redeemable in seven years’ time at their nominal value of $100 per loan note and which pay interest of 6% per year.
The finance director of Ring Co wishes to determine the value of the company.
Ring Co has a cost of equity of 10% per year and a before-tax cost of debt of 4% per year. The company pays corporation tax of 25% per year.
The finance director of Ring Co has been advised to calculate the net asset value (NAV) of the company.
Which of the following statements about valuation methods is true?
A. The earnings yield method multiplies earnings by the earnings yield
B. The equity market value is number of shares multiplied by share price, plus the market value of debt
C. The dividend valuation model makes the unreasonable assumption that average dividend growth is constant
D. The price/earnings ratio method divides earnings by the price/earnings ratio