M8: Capital Structure

Question 1

Why and how might you value unlisted shares using dividends?

Answer 1

Dividend growth model

Question 2

Can you calculate the value of a company based on a varying flow of dividends?

Answer 2

Calculate the PV of the preceding years and then add on normal D Growth model

e.g. In year 1, it expects 15p, followed by 25p in year 2 before settling at 30p in year 3. Dividend growth thereafter will be 5% pa (per annum, ie each year).

A required rate of return of 15% is expected.

= 15p/1.15 + 25p/1.15^2 + 30p/1.15^3 + [ 30p(1.05)/(0.15-0.05) x 1/1.15^3 ]

Question 3

Can you calculate the value of a company based on a regular flow of dividends?

Answer 3

Regular flow of dividends:

Price of share = D (1 + expected growth) / (RoR - g)

where:
- The value of company = No. of shares x MV of one share

Question 4

What is the difference between irredeemable preference shares and redeemable preference shares and how do you calculate their valuations?

Question 5

How do you value redeemable and irredeemable bonds?