(a) Outline and discuss the potential problems involved in using a dividend growth model to value equity. (b) Consider the following information for Trident plc. The current dividend per share is 10p. Shareholders require a return of 10% per annum. The dividend growth rate is assumed to be 25% for years 1-3 and 7% thereafter. What is Trident's current share price? (c) The Capital Asset Pricing Model (CAPM) has been put forward as an alternative to the Dividend Valuation Model in calculating a company's cost of equity capital. Why might the two models not provide the same estimate in practice?
(a) Outline and discuss the potential problems involved in using a dividend growth model to value equity. (b) Consider the following information for Trident plc. The current dividend per share is 10p. Shareholders require a return of 10% per annum. The dividend growth rate is assumed to be 25% for years 1-3 and 7% thereafter. What is Trident's current share price? (c) The Capital Asset Pricing Model (CAPM) has been put forward as an alternative to the Dividend Valuation Model in calculating a company's cost of equity capital. Why might the two models not provide the same estimate in practice?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Question 5
(a) Outline and discuss the potential problems involved in using a dividend growth
model to value equity.
(b) Consider the following information for Trident plc.
The current dividend per share is 10p.
Shareholders require a return of 10% per annum.
The dividend growth rate is assumed to be 25% for years 1-3 and 7% thereafter.
What is Trident's current share price?
(c) The Capital Asset Pricing Model (CAPM) has been put forward as an alternative
to the Dividend Valuation Model in calculating a company's cost of equity capital.
Why might the two models not provide the same estimate in practice?
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