• a.When using the Gordon growth formula, assuming that RE > g, describe, in general terms, what happens as g gets closer to RE. Examine, and give examples of, what happens to P₀ as g becomes very close to RE. (4 marks)
• b.If RE = g or RE < g, what are the results of using the Gordon growth formula? Discuss in detail an approach that could be adopted, if you still want to use a dividend discount model. (8 marks)
• c.What other situation can cause problems with using the Gordon growth formula? What does this mean for the valuation of companies that are in this situation? Outline any approaches that might assist you in the valuation of these companies. (5 marks)

• d.You own shares in Mhass Plc who have paid dividends since 2013. The annual dividends have been rising annually from 1.05 in 2013 to 1.80 in 2020. The companys beta was 1.2.

  The UK 10 Year Bond rate in 2020 was 0.25% and the market risk premium was assumed to be 4%.

  The company has announced that, in order to enable a faster business growth, they will be retaining more profit in future years and, therefore, will be reducing the dividend rate by 1% per annum over the next five years starting in 2021. At the end of year 5 they expect to maintain that dividend rate in perpetuity.

  • i.What is the historical growth rate of Mhass Plc to 2 decimal points? (2 marks)
  • ii.Derive the current cost of equity for the company to 2 decimal points. (1 mark)
  • iii.Calculate the fundamental value of Mhass Plc. (4 marks)