Question 1

'VertiFarm PLC', a vertical farming company, has just paid a dividend of 20 cents per share. Dividends are expected to grow at 10% for the next year, and then at a constant rate of 4% per annum in perpetuity. The cost of equity is 12%.

Using the Dividend Valuation Model, what is the current ex-dividend share price of VertiFarm PLC?

Accepted Answer

Calculate the dividend for Year 1 (D1) using the 10% growth rate. Then apply the standard DVM formula P0 = D1 / (Ke - g) using the long-term 4% growth rate.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using D0 instead of D1 in the numerator, or applying the 10% growth rate into perpetuity.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 3

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