Does the Dividend valuation model: “The MV is the PV of future expected dividends, discounted at the shareholders required rate of return” applies to unquoted companies as well?

Does the same dividend valuation model formula Do (1+g) / re-g is called Gordon growth model ?

In the notes of this chapter, we have heading “The valuation of equity – non-constant dividends” but there is no example of non-constant dividend below the notes anywhere. There is only one example which is for constant dividend only.

PS: My mistake, I posted it somewhere else before.

But that section carries on to explain about non-content dividends – read it carefully and look at example 5 and example 6!

(I hope you are watching the lectures – the lecture notes should not be used on their own because it is in the lectures I explain and expand on the notes.)

Yes, I am watching. I am not sure that questions like below is in the syllabus of F9 or not. If it is in the syllabus, can you please help me solving it?

The current dividend on a stock is $2 per share and investors require a rate of return of 12%.
What is the price of the stock if dividends are expected to grow at a rate of 20% per year over the next three years and then at a rate of 5% per year from that point onwards.

As obvious as it seems but it just didn’t make sense to me as to why we added the dividend about to be paid to the ex-dividend amount to calculate cum-div. I was going to subtract it so my concept must be totally wrong there. Could you explain?

What I also didn’t understand is that in the case of Ex-Div when we say that the dividend has just been paid then the shareholders must immediately receive the dividend, so why in that case the dividend will be paid after a year.

Lets assume a share is valued on an ex div basis at $100 based on FUTURE dividends and growth etc. Well if a dividend has just been paid, we have missed it, so we look to value the share based on the normal ex div method. Now lets say that the same $100 share is carrying a dividend which is just about to be paid…lets say the dividend due is $2. Well now the share is still valued at the $100 based on its future dividends, but that share is also carrying and extra $2 value because of the due dividend. So the dividend about to be paid is added to the ex div value. I hope this makes sense, and I hope John does not mind me offering help.

If you buy a share cum div then you will then immediately get the current dividend, whereas if you buy it ex div you will not get the current dividend (because it has already been paid) and will have to wait a year to receive your first dividend.
Therefore you will be prepared to pay more if you are buying a share cum div.

i was just looking at the papers and came across this question; TKQ Co has just paid a dividend of 21 cents per share and its share price one year ago was $3·10 per share. The
total shareholder return for the year was 19·7%.

Im confused as none of the formulas work on this , can you please clarify

Hi John,
I am a little confused between e.g #2 and #4 which basically asked the same question and obviously had the same answer. I am trying to understand your explanation about using the present value to find the market value in #4. Was this to show the two ways of getting the same answer?

If you have finished the lecture you will realise that usually we simply use the formula that is given in the exam. However, given that 50% of the exam is writing as opposed to arithmetic, it is desperately important that you understand the logic behind what we are doing and the premise that the market value is the present value of future expected dividends.

June 2008 past paper Ques 2 (d)
The P/E ratio of 7.5 is used to determine the Present Value of $720,000 of the after-tax savings (96,000 x 7.5 = $720,000).
How is it possible to use the P/E ratio to determine the present value? I think i understand “why” we use it, i just didn’t realize the P/E ratio could be used to determine the PV.

I apologize for asking this question here but i couldn’t find the Ask the Tutor page.

He should not have used the term present value. The P/E ratio does not replace discounting and does not give a present value in that sense.

What he means is that the value of a share (using the P/E approach) will be the EPS x P/E ratio.

So……if the earnings increase the the market value increases.

(PS To find the Ask the Tutor forums, click on ‘forums’ on the bar at the top of this page, and then click on ‘Ask ACCA Tutor’. Then you will get a list of the Ask the Tutor forums for each paper)

Okay, got it now. Thanks very much for your help. You’re a wonderful tutor, you always make things so easy to understand. (and thanks also for the link information)

Mr John, I have got a question – Why is that when we have a question that includes shares at par of say 25c we have to divide the share by 0. 25 in order to turn it into a $1 share? (to calculate rights issue for example) and then we want to include the shares in the balance sheet, we multiply by 0.25 in order to turn it again to a share of 0.25c!

Sorry if this is a dumb question, this point always confuses me, I have no idea why do we need the share to be a $1 share? Why not just perform our calculations on a 25c share?

We do perform our calculations on 25c if that is the nominal value.

What I am guessing you are confusing it with is that quite often in questions you are told the total nominal value of the shares (an extract from the Statement of Financial Position) and we need the number of shares.
So…..if the nominal value is 25c a share and the SOFP figure for share capital is $100M, then $100M is the total nominal value of all the shares and so there must be 400M shares of 25c.

The videos are all working fine – the problem must be at your end.
Have you looked at the technical support page? You will likely find support for your device there.

Why is it only the future expected dividend that effects the theoretical value of the share price? Why wouldn’t the expected capital gain of the share be a consideration too for instance? Thanks.

In theory, it is the expected dividends that affect the share price. If the dividends are expected to grow, then over time the share price will grow (and therefore we have a capital gain). However the only reason for the capital gain is because of increased expectation of dividends. (All in theory, obviously 🙂 )

Could you help me understand why share prices on the stock exchange keep changing every day but for the same companies? for sure I know that dividends from what we have learned is a factor but not paid daily I guess and so is interest rate.

The share price is based on what investors expect in the future.
So although dividends are a factor, it is expected future dividends.

News about the company comes out all the time (and also about the state of the economy – which affects companies).

If there is news that makes investors expect the company will do better in the future, then they will be prepared to pay more for the shares – and so the share price will increase.
If there is news that makes investors expect that the company will do worse in the future, then the share price will fall.

if there is any chance of me passing my ACCA papers it’s all due to this amazing website…. the lecturers are just superb and everything they say is engrained into our brains.. 🙂

this particular lecture keeps stopping and stare ting, been here since 7am and I’ve not even made it half way the lecture. All other lectures are top notch.

Laiq Hussain says

Hi sir,

Does the Dividend valuation model: “The MV is the PV of future expected dividends, discounted at the shareholders required rate of return” applies to unquoted companies as well?

Does the same dividend valuation model formula Do (1+g) / re-g is called Gordon growth model ?

Thanks,

John Moffat says

In theory it applies to all companies – quoted or unquoted.

Laiq Hussain says

Thanks,

In study texts, we have Gordon growth model. Is it the same Dividend valuation model or different?

John Moffat says

The same 🙂

Laiq Hussain says

Hi Mr. Moffat,

In the notes of this chapter, we have heading “The valuation of equity – non-constant dividends” but there is no example of non-constant dividend below the notes anywhere. There is only one example which is for constant dividend only.

PS: My mistake, I posted it somewhere else before.

Thanks,

John Moffat says

But that section carries on to explain about non-content dividends – read it carefully and look at example 5 and example 6!

(I hope you are watching the lectures – the lecture notes should not be used on their own because it is in the lectures I explain and expand on the notes.)

Laiq Hussain says

Yes, I am watching. I am not sure that questions like below is in the syllabus of F9 or not. If it is in the syllabus, can you please help me solving it?

The current dividend on a stock is $2 per share and investors require a rate of return of 12%.

What is the price of the stock if dividends are expected to grow at a rate of 20% per year over the next three years and then at a rate of 5% per year from that point onwards.

Thanks,

John Moffat says

Yes – it is in the syllabus and is often asked.

But you must ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.

Arun says

Hi John,

As obvious as it seems but it just didn’t make sense to me as to why we added the dividend about to be paid to the ex-dividend amount to calculate cum-div. I was going to subtract it so my concept must be totally wrong there. Could you explain?

What I also didn’t understand is that in the case of Ex-Div when we say that the dividend has just been paid then the shareholders must immediately receive the dividend, so why in that case the dividend will be paid after a year.

Thanks.

Gary says

Lets assume a share is valued on an ex div basis at $100 based on FUTURE dividends and growth etc. Well if a dividend has just been paid, we have missed it, so we look to value the share based on the normal ex div method. Now lets say that the same $100 share is carrying a dividend which is just about to be paid…lets say the dividend due is $2. Well now the share is still valued at the $100 based on its future dividends, but that share is also carrying and extra $2 value because of the due dividend. So the dividend about to be paid is added to the ex div value. I hope this makes sense, and I hope John does not mind me offering help.

John Moffat says

If you buy a share cum div then you will then immediately get the current dividend, whereas if you buy it ex div you will not get the current dividend (because it has already been paid) and will have to wait a year to receive your first dividend.

Therefore you will be prepared to pay more if you are buying a share cum div.

fahim231 says

hello sir

i was just looking at the papers and came across this question; TKQ Co has just paid a dividend of 21 cents per share and its share price one year ago was $3·10 per share. The

total shareholder return for the year was 19·7%.

Im confused as none of the formulas work on this , can you please clarify

John Moffat says

It is not using a formula from the formula sheet.

The shareholder return for the year is the dividend plus the increase in market value, as a percentage of the market value.

So the total return here is 19.7% x 3.10 = 0.61.

Sine the dividend is 0.21, the market value must have increased by 0.40.

cecel says

Hi John,

I am a little confused between e.g #2 and #4 which basically asked the same question and obviously had the same answer. I am trying to understand your explanation about using the present value to find the market value in #4. Was this to show the two ways of getting the same answer?

John Moffat says

I don’t understand why you are confused.

If you have finished the lecture you will realise that usually we simply use the formula that is given in the exam. However, given that 50% of the exam is writing as opposed to arithmetic, it is desperately important that you understand the logic behind what we are doing and the premise that the market value is the present value of future expected dividends.

cecel says

okay! understood! Thanks!

308002873 says

June 2008 past paper Ques 2 (d)

The P/E ratio of 7.5 is used to determine the Present Value of $720,000 of the after-tax savings (96,000 x 7.5 = $720,000).

How is it possible to use the P/E ratio to determine the present value? I think i understand “why” we use it, i just didn’t realize the P/E ratio could be used to determine the PV.

I apologize for asking this question here but i couldn’t find the Ask the Tutor page.

John Moffat says

He should not have used the term present value. The P/E ratio does not replace discounting and does not give a present value in that sense.

What he means is that the value of a share (using the P/E approach) will be the EPS x P/E ratio.

So……if the earnings increase the the market value increases.

(PS To find the Ask the Tutor forums, click on ‘forums’ on the bar at the top of this page, and then click on ‘Ask ACCA Tutor’. Then you will get a list of the Ask the Tutor forums for each paper)

308002873 says

Okay, got it now. Thanks very much for your help. You’re a wonderful tutor, you always make things so easy to understand. (and thanks also for the link information)

John Moffat says

You are welcome – and thank you 🙂

mahoysam says

Mr John, I have got a question – Why is that when we have a question that includes shares at par of say 25c we have to divide the share by 0. 25 in order to turn it into a $1 share? (to calculate rights issue for example) and then we want to include the shares in the balance sheet, we multiply by 0.25 in order to turn it again to a share of 0.25c!

Sorry if this is a dumb question, this point always confuses me, I have no idea why do we need the share to be a $1 share? Why not just perform our calculations on a 25c share?

Thanks,

Maha

John Moffat says

We do perform our calculations on 25c if that is the nominal value.

What I am guessing you are confusing it with is that quite often in questions you are told the total nominal value of the shares (an extract from the Statement of Financial Position) and we need the number of shares.

So…..if the nominal value is 25c a share and the SOFP figure for share capital is $100M, then $100M is the total nominal value of all the shares and so there must be 400M shares of 25c.

We never turn them into $1 shares – ever 🙂

mahoysam says

I see, lol! It was a dumb question !!

Thank you Mr John.

Hoping to pass!

Maha

John Moffat says

No problem 🙂

kenton spencer says

i cannot seem to view the videos

John Moffat says

The videos are all working fine – the problem must be at your end.

Have you looked at the technical support page? You will likely find support for your device there.

kenton spencer says

i cannot see to view the videos

neilsolaris says

Why is it only the future expected dividend that effects the theoretical value of the share price? Why wouldn’t the expected capital gain of the share be a consideration too for instance? Thanks.

John Moffat says

In theory, it is the expected dividends that affect the share price. If the dividends are expected to grow, then over time the share price will grow (and therefore we have a capital gain). However the only reason for the capital gain is because of increased expectation of dividends. (All in theory, obviously 🙂 )

neilsolaris says

I see! Thanks for explaining that for me.

Yando says

Could you help me understand why share prices on the stock exchange keep changing every day but for the same companies? for sure I know that dividends from what we have learned is a factor but not paid daily I guess and so is interest rate.

John Moffat says

The share price is based on what investors expect in the future.

So although dividends are a factor, it is expected future dividends.

News about the company comes out all the time (and also about the state of the economy – which affects companies).

If there is news that makes investors expect the company will do better in the future, then they will be prepared to pay more for the shares – and so the share price will increase.

If there is news that makes investors expect that the company will do worse in the future, then the share price will fall.

Yando says

Very clear. Awesome!!! Thanks alot

John Moffat says

You are welcome 🙂

umair112 says

how could i see the book in which the tutor solve example or understanding..pleas guid

John Moffat says

If you look above the video, it says that the lectures are based on our Course Notes!!! You can download them on this website.

aloy4christ says

Does the lecture have mobile phone version? Like hw many megabytes do I need to have b/4 watching the lecture whether on phone or laptop computer?

admin says

most lectures are on average 15-30MB

Safwan says

if there is any chance of me passing my ACCA papers it’s all due to this amazing website…. the lecturers are just superb and everything they say is engrained into our brains.. 🙂

umair112 says

@safwanjaffary, what meterial are use for f9?

Safwan says

@umair112, i am studying F9 from BPP study text and the notes provided here on opentuition.

busay44 says

This lecture has really helped me to understand rather than just cramming formulars to the exam

afridi420 says

admin this video stops every aftr 2min.plz do somthing

admin says

maybe your internet is slow. lecture plays fine

Khadija says

thanku so much my doubts are clear now…..

avsebaale says

this particular lecture keeps stopping and stare ting, been here since 7am and I’ve not even made it half way the lecture. All other lectures are top notch.

admin says

Wait for the lecture to fully load before you press play