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Following scenario relates to the questions 3 , 4 and 5 . Bloom Co is listed on the stock market and has increased earnings over

Following scenario relates to the questions 3,4 and 5. Bloom Co is listed on the stock market and has increased earnings over the last year. As a result, the board of directors has increased the dividend payout ratio from 36% for the year to June 20X4 to 37.1% for the year to June 20X5. Bloom Co has a cost of equity of 13%. The following information is also available:
Year to June 20X4 Earnings - $12,100 Ordinary Shares - $12,700
Year to June 20X5 Earnings - $7,000 Ordinary Shares - $7000
The nominal value of ordinary shares of Bloom Co is $0.50 per share. Listed companies similar to Bloom Co. have an earnings yield of 9.2%
3. What is the equity market value of Bloom Co. using the Dividend growth model?
a) $39m
b) $92m
c) $97m
d) $105.5m
4. What is the equity market value of Bloom Co. using the Earnings yield method?
a) $12m
b) $105.5m
c) $132m
d) $138m
5. The following statements relate to the Dividend Growth Model (DGM) and the Earnings Yield Method (EYM)
i. The EYM uses profit (rather than cash) so is the preferable method for Bloom Co.
ii. In an acquisition context, the EYM is used to value a minority shareholding in a target company. Are all the statements true or false?
a) Both statements are true
b) Both statements are false
c) Statement 1 is true and Statement 2 is false
d) Statement 2 is true and Statement 1 is false

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