Q2.

A) dividend valuation

This is dividend valuation model is based on future dividend payments when discounted back to
their present values and current market price of stock. this model is applicable for dividend paying
companies. It is quantitative model, used to find stock price by using discounted rate as cost of
equity.

P= D1/(1+r) ^t

P: represent price of stock.

D1: represent future dividend.

R: represent required rate of return.

T: represent time.

Limitations

1. Only use for dividend paying companies

2. Do not consider stock buyback.
3. Ignore accounting tax rules.
4. Dividend model is irrelevant for large corporation because stockholders have large
proportion of investment and have control to change dividend policy.
5. This model is considered is too much conservative because it only accounts for dividend, it
ignores most of asset such as brand name of corporation.

B) Cost of equity

basically, CAPM model Is to evaluate cost of equity but dividend discounted model is also used to
find required rate of return because here only shareholders are investors so cost of equity is used to
discount future dividend. According to this model dividends are growing at constant rate in future.
And current price is as market capitalization.

Re= (D1/po) +g

Limitations

1. Assumption of constant dividend growth is invalid, in future companies may be pay less or
more dividend depending on situation.so, it generates inaccurate result of valuation.
2. There must be profitability and relationship for dividend paying companies. Because
companies who re paying dividend must generate positive EPS every year and its payout
ratio with increase of EPS.
3. It assumes that cost of equity is always greater than growth of dividend, but it is not true
most of time.
c) g= (65/34) ^ (1/7) -1

Growth rate is 9.7%

Required rate of return.

Price 436 pence

Dividend 65

Required rate of return= (D1/PO) +g

= (65/436) +0.097

=24.6%

d) data is not enough to calculate this part.