Question 1

Section B - Case 2: Helios Co

Helios Co operates wind farms across Europe. It is looking to acquire a smaller competitor, Aura Ltd. To assess the acquisition, Helios needs to calculate its own Weighted Average Cost of Capital (WACC) and value Aura Ltd.

Helios Co Data:
Current share price: $4.50
Recent dividend paid (D0): $0.30
Historical dividends:
4 years ago: $0.24
3 years ago: $0.25
2 years ago: $0.27
1 year ago: $0.28

Using the historical dividend growth rate, what is Helios Co's estimated Cost of Equity (Ke) using the Dividend Valuation Model?

Accepted Answer

First, calculate the historical growth rate 'g' using the formula: g = (Latest Dividend / Earliest Dividend)^(1/n) - 1, where n is the number of years of growth. Then apply the DVM formula: Ke = [D0(1+g) / P0] + g.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using n=5 instead of n=4 for the growth calculation. (There are 5 dividends, but only 4 periods of growth).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 2

More questions from this exam