CIMA Exam CIMAPRA19-F03-1 Topic 1 Question 113 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 113
Topic #: 1

[All CIMAPRA19-F03-1 Questions]

An unlisted company is attempting to value its equity using the dividend valuationmodel.

Relevant information is as follows:

* A dividend of$500,000 has just been paid.

* Dividend growth of 8% is expected for the foreseeable future.

* Earnings growth of 6% is expected for the foreseeable future.

* The cost of equity of a proxy listed company is 15%.

* The risk premium required due tothe companybeing unlisted is 3%.

The calculationthat has been performedis as follows:

Equity value = $540,000 / (0.18 - 0.08) = $5,400,000

What is thefaultwith the calculation that has been performed?

AThecost of equityused in the calculation should have been12% (15% subtract3%).

BThe dividend cashflow used should have been $500,000 rather than$540,000.

CThe dividend growth rate is unsuitable given that earning growth is lower than dividend growth.

DThe cost of equityused in the calculation should have been 15%; no adjustment was necessary.

Show Suggested Answer

Suggested Answer: C

by Ivan at Jul 12, 2025, 01:08 PM

Limited Time Offer

25%

Off

Get Premium CIMAPRA19-F03-1 Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Dewitt

18 days ago

Wow, this company must be really good at magic to make their dividends grow faster than their earnings! I wonder if they have a unicorn in the backyard or something.

upvoted 0 times

...

Adelina

20 days ago

So, the correct answer is A) The cost of equity used in the calculation should have been 12% (15% subtract 3%).

upvoted 0 times

...

Mariann

22 days ago

Yes, but we need to adjust for the 3% risk premium due to the company being unlisted.

upvoted 0 times

...

Kristian

23 days ago

The dividend growth rate of 8% is way too high compared to the earnings growth rate of 6%. This is not sustainable in the long run.

upvoted 0 times

...

Ciara

30 days ago

The cost of equity should be 12%, not 15%. The 3% risk premium for being unlisted should be subtracted from the proxy company's cost of equity.

upvoted 0 times

...

Carman

1 months ago

But isn't the cost of equity of the proxy listed company 15%? So, shouldn't it be used in the calculation?

upvoted 0 times

...

Adelina

1 months ago

I agree with Mariann, the cost of equity should have been 12% instead of 15%.

upvoted 0 times

...

Mariann

2 months ago

I think the fault is with the cost of equity used in the calculation.

upvoted 0 times

...