SIDC Module 12 Equity financing, dividend policy and valuation question: share's value under the constant-growth model

SIDC Module 12Equity financing, dividend policy and valuation

Sentosa Bhd has just paid a dividend of RM0.40. Dividends are expected to grow at 5% a year forever and investors require 10%. What is the share's value under the constant-growth model?

A RM4.00
B RM4.20
C RM8.00
D RM8.40

Show the answer and explanation

Answer: D. RM8.40

Gordon growth: P0 = D1 ÷ (r − g), where D1 = D0 × (1 + g) = 0.40 × 1.05 = 0.42. P0 = 0.42 ÷ (0.10 − 0.05) = RM8.40. RM8.00 uses the dividend just paid (D0) instead of next year's. RM4.20 divides D1 by r alone, ignoring growth. RM4.00 divides the dividend just paid by the required return alone. Source: SIDC Module 12 Study Outline (Jul-Dec 2026) Section 6 Topics 10-12 (Equity Financing, Dividend Policy, Valuation); A. Damodaran, Investment Valuation (as at October 2026).

Common mistake

Using D0 in place of D1.

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A company will pay RM0.50 next year and RM0.60 the year after; from then on dividends grow at 5% a year. The required return is 12%. What is the share's value today?The risk-free rate is 3.5%, a share's beta is 1.2 and the market risk premium is 6%. The next dividend is RM0.30 and dividends grow at 4% a year. What is the share's value?Next year's free cash flow to the firm is RM50 million, growing 3% a year forever. The WACC is 9%. The company has RM300 million of debt and 100 million shares. What is the value per share?

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Original study material mapped to the public SIDC Module 12 syllabus. Unofficial, not endorsed by SIDC or the SC. Verify figures and rules against current guidance before relying on them.