The following scenario relates to questions 21 to 25.
Ring Co has in issue ordinary shares with a nominal value of $0.25 per share. These shares are traded on an efficient capital market. It is now 20X6 and the company has just paid a dividend of $0.450 per share. Recent dividends of the company are as follows:
Using the dividend growth model, what is the market value of each ordinary share?
Historical dividend growth rate = 100 x ((0.450/0.370)0.25 – 1) = 5%
Share price = (0.450 x 1.05)/(0.1 – 0.05) = $9.45
What is the market value of each loan note?
Market value = (6 x 6.002) + (100 x 0.760) = 36.01 + 76.0 = $112.01
The finance director of Ring Co has been advised to calculate the net asset value (NAV) of the company.
Which of the following formulae calculates correctly the NAV of Ring Co?
Non-current assets plus current assets less total liabilities is the correct formula.
Which of the following statements about valuation methods is true?
The dividend valuation model makes the unreasonable assumption that average dividend growth is constant is correct.
Which of the following statements about capital market efficiency is/are correct?
(1) Insider information cannot be used to make abnormal gains in a strong form efficient capital market
(2) In a weak form efficient capital market, Ring Co’s share price reacts to new information the day after it is announced
(3) Ring Co’s share price reacts quickly and accurately to newly-released information in a semi-strong form efficient capital market
Insider information cannot be used to make abnormal gains in a strong form efficient capital market and Ring Co’s share price reacts quickly and accurately to newly-released information in a semi-strong form efficient capital market are correct.