Question 1

**Section A**

BioPharma Innovations has just paid a dividend of $0.50 per share. Dividends are expected to grow at a constant rate of 4% per annum in perpetuity. The shareholders' required rate of return (cost of equity) is 10%.

Using the Dividend Valuation Model (DVM), what is the theoretical ex-dividend market price of one share?

Accepted Answer

Apply the Dividend Growth Model formula: P0 = [D0 × (1 + g)] / (Ke - g). Ensure you use D1 (next year's dividend) in the numerator.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using D0 ($0.50) in the numerator instead of D1 ($0.52), resulting in $8.33.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 5

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