F3 Exam Dumps | An unlisted company is attempting to value its equity using the dividend valuation model. Relevant information

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CIMA.F3.v2022-12-26.q136
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Question 13/136

An unlisted company is attempting to value its equity using the dividend valuation model.
Relevant information is as follows:
* A dividend of $500,000 has just been paid.
* Dividend growth of 8% is expected for the foreseeable future.
* Earnings growth of 6% is expected for the foreseeable future.
* The cost of equity of a proxy listed company is 15%.
* The risk premium required due to the company being unlisted is 3%.
The calculation that has been performed is as follows:
Equity value = $540,000 / (0.18 - 0.08) = $5,400,000
What is the fault with the calculation that has been performed?

A. The dividend cashflow used should have been $500,000 rather than $540,000.

B. The cost of equity used in the calculation should have been 15%; no adjustment was necessary.

C. The dividend growth rate is unsuitable given that earning growth is lower than dividend growth.

D. The cost of equity used in the calculation should have been 12% (15% subtract 3%).

Correct Answer: C

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