ExpertMedium2 marksShort Answer
ACCA · Question 21 · Business Valuations
Section B - Case 2: AeroDynamics PLC
Scenario: AeroDynamics PLC, an aerospace manufacturer, is evaluating the acquisition of a target company, HeliParts. HeliParts has just paid an annual dividend of $0.40 per share. Historical dividend data shows that 4 years ago, the dividend was $0.32 per share. HeliParts' cost of equity is estimated at 12%. The company has 5 million ordinary shares in issue. HeliParts also has $10 million of 8% irredeemable bonds trading at $105 per $100 nominal value. The corporate tax rate is 25%.
Calculate the historical annual dividend growth rate for HeliParts. (Express your answer as a percentage to two decimal places, e.g., 5.25).
Section B - Case 2: AeroDynamics PLC
Scenario: AeroDynamics PLC, an aerospace manufacturer, is evaluating the acquisition of a target company, HeliParts. HeliParts has just paid an annual dividend of $0.40 per share. Historical dividend data shows that 4 years ago, the dividend was $0.32 per share. HeliParts' cost of equity is estimated at 12%. The company has 5 million ordinary shares in issue. HeliParts also has $10 million of 8% irredeemable bonds trading at $105 per $100 nominal value. The corporate tax rate is 25%.
Calculate the historical annual dividend growth rate for HeliParts. (Express your answer as a percentage to two decimal places, e.g., 5.25).
How to approach this question
Use the compound growth formula: g = (Latest Dividend / Oldest Dividend)^(1/n) - 1. Here, n is 4 years.
Full Answer
To find the historical growth rate, use the formula: $g = \left(\frac{D_0}{D_{-n}}\right)^{\frac{1}{n}} - 1$
$D_0 = \$0.40$
$D_{-4} = \$0.32$
$n = 4$
$g = \left(\frac{0.40}{0.32}\right)^{\frac{1}{4}} - 1$
$g = (1.25)^{0.25} - 1$
$g = 1.05737 - 1 = 0.05737$
Expressed as a percentage to two decimal places: 5.74%.
Common mistakes
Using n=5 instead of n=4. If the dividend was paid 4 years ago, there have been 4 periods of growth.
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