Question 1

**Section B - Case 3: AeroFreight Logistics**

*Scenario:* AeroFreight Logistics operates drone deliveries across Europe and Asia. The company is based in the UK (GBP). It owes a supplier €500,000 payable in 6 months. 
Spot rate: €1.1500 - €1.1550 / £1
6-month forward rate: €1.1400 - €1.1460 / £1
UK 6-month borrowing rate: 4% (annual)
Euro 6-month deposit rate: 2% (annual)

**Question 3:** AeroFreight's current share price is £3.50. It has just paid a dividend of £0.25. Dividends have grown from £0.20 four years ago.

Using the historical dividend growth rate, what is AeroFreight's estimated cost of equity? (Round to one decimal place)

Accepted Answer

First, calculate the historical growth rate 'g' using the formula: g = (Latest Dividend / Oldest Dividend)^(1/n) - 1, where n is the number of years of growth. Then apply the Dividend Valuation Model: 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, or forgetting to multiply D0 by (1+g) in the Ke formula.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 5

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