Question 1

**Section A**

AstroTours PLC, a space-tourism company, has just paid a dividend of $0.40 per share. The current share price is $5.20. Historically, dividends have grown at a steady rate of 5% per annum, and this is expected to continue indefinitely.

Using the Dividend Valuation Model (DVM), what is AstroTours' estimated cost of equity?

Accepted Answer

Use the formula Ke = (D1 / P0) + g. Remember that D1 is the expected dividend next year, which is D0 * (1 + g).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using the dividend *just paid* (D0) in the numerator instead of the *expected* dividend (D1).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 1

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