【正确答案】As the payout ratio has increased from 40·0% in the year to March 2014 to 41·4% in the year to March 2015, the totaldividend has increased from $5,280,000 (13,200,000 x 0·4) for the year to March 2014 to $5,729,760 (13,840,000 x0·414) for the year to March 2015. This represents dividend growth of 8·52% (5,729,760/5,280,000). Provided the future dividend growth rate is expected to be similar to the historic dividend growth rate, the calculated dividendgrowth rate of 8·52% can be used in the dividend growth model. The equity market value using the dividend growth model is therefore: (5,729,760 x 1·0852)/(0·125 – 0·0852) = $156,229,537 or $156·2 million. Examiner’s Note: Full credit could be obtained by calculating the equity market value from a share price calculated using the dividend growth model, although calculating a share price was not necessary. Number of shares = 8,000,000/0·5 = 16,000,000 shares Earnings per share = 100 x 13,840,000/16,000,000 = 86·5 cents per share Dividend per share = 86·5 x 0·414 = 35·8 cents per share Share price = (35·8 x 1·0852)/(0·125 – 0·0852) = 976 cents or $9·76 per share Equity market value = 9·76 x 16,000,000 = $156·2 million

【正确答案】Equity market value using the earnings yield approach: Earnings/earnings yield = 13,840,000/0·082 = $168,780,488 or $168·8 million

【正确答案】Cash-flow valuation models tend to be preferred to profit-based valuation models and so the dividend growth model (DGM)could be preferred to the earnings yield method (EYM), as the DGM uses cash, while the EYM uses profit. The DGM has used information specific to Chad Co, whereas the earnings yield method has used an average earnings yieldrelating to companies which are similar to Chad Co. The DGM valuation is therefore likely to be more relevant to Chad Cothan the EYM valuation, as Chad Co is likely to be different from the average company in its business area. The two valuation methods relate to different valuation purposes in an acquisition context. The dividend growth model valuesa minority shareholding in a target company, while the earnings yield valuation gives a value from the perspective of theacquirer, provided the earnings yield used is appropriate. Both the DGM and the EYM assume that relevant valuation variables, such as the dividend growth rate, the cost of equityand the earnings yield, will remain constant in the future in perpetuity. This is very unlikely to be true and reduces theusefulness of the two valuation methods.