I wanted to ask is there a direct or inverse relationship between the shareholders’ required rate of return and the market value of shares? Could you please illustrate this with the help of an example?

The market value is the present value of future dividends, discounted at the shareholder required rate of return
This is all explained – with examples – in the lectures that go with Chapter 15 of our free lecture notes.
(The lectures are a complete course and are supposed to be watched in order!)

Hello sir
I have just startrd watching this video and I feel my heads going round in circles.
sir ealier you have stated that the MV of shares is determined using the future expected divdends & Re. But in this video, u hv said that the Re is determined using the future expected dividends and the MV quoted in the S/E.
but how can we do that if we need the Re in the first place to determine the market value?
or is the application of growth model just suitable for unquoted co.’s?
And if so, how is the share price of quoted co.’s determined?
Also,since one of the many limitations of the growth model is that the Re used in the computation of MV is that it is just an estimate,i figured that there must be a certain way of estimating it rather than just working the formula backwards.
I fear I am getting everything jumbled up

if think you have to take it like this, in the first lecture on valuation of securities, you were shown how to calculate mkt price, which in its simplest way is the dividend divided by the expected rate of return (Re).The unknown was the market price.

As stated in page 83 of lecture notes,mkt price is determined by shareholders, the price at which they wud be prepared to pay on stock exchange.

Lets say you have a share of $1 nominal value, which gives you a dividend of 20c the year. The rate of interest is 10%. At what rate would a person normally agree to buy your share at most? Answer is nearly to the same rate at which you would be earning interest at the bank. I dnt think you would sell it for 1$, because you are getting 20% off it (20c / $1). $1 would earn an interest of 10c at the bank. People would not buy your share for $3, earning just 20c as dividend coz the bank would earn the an interest of 30p.

At most, people would be willing to pay X$ which would earn them a dividend of 20c at a rate of return similar to the bank (10%), hence, would pay 20c/10% = $2 at most for the share because it would get them equivalent return to bank.

Now you yourself, would you be ready to pay $3 for a share which earns you 20c whilst the bank offers an interest of 10% per annum? Answer is obviously no. However, if the share is 1.95$, you would probably go for the share instead of the bank. The maximum amount you would be likely to pay would be the equivalent of rate of interest earned throuh the bank which is $2.

The rate of return is not to be confused with the rate of interest. People may expect a higher return by investing in shares as compared to bank interest, given the risk associated.

Now, if you know the market price and the dividend, just find the unknown, that is the expected rate of return

It does actually:)
it was the bank interest rate portion I was missing out.
let me still clarify- so what your saying is-the share price is decided keeping in mind the int. rate and what rate of return the shateholders are likely to require because of the present interest rate. And then setting a price thats not going to make the co. lose out but is attractive to shareholders at the same time right?
thanks a bunch!!!!

This sort of question really belongs in the Ask the Tutor Forum rather than as a comment on a lecture!

Shareholders determine the price of the shares based on the dividends they expect and the return they require.

For a quoted company we know what the share price is, and so we can ‘work backwards’ to determine what return shareholders are requiring and therefore what the company needs to give them (and therefore what return the company needs to earn from projects in order to satisfy the shareholders).

Dear Sir,
Can you help me with this question?…….
A Co has just paid a dividend of 23 cents and it is expected to remain the same next year and increase by 3 percent thereafter. What is the current market value of the share if the required return is 12 percent? The answer given is 2.56….I don’t get it.

In future please ask questions like this in the Ask the Tutor Forum – not as a comment on a lecture!

We use the formula from the formula sheet: (Do(1+g))/(Re – g)
The top bit on the formula (Do(1+g)) is next years dividend which is usually the current dividend times (1+g). However in this question, next years dividend is 23c and not 23c plus growth.

Although from year to year the growth may be positive or negative, we are after the average growth per year over the whole period. This will always be positive in the exam.

The only relevant figures here are 28,000 and 33,000 – the earliest and latest dividends.

I assume you are referring to the market value of the debentures.
The price given in the question is 90, but since interest is about to be paid this is a cum interest value. We need the ex interest value which is 90 – 12 = 78.

(In future please ask this sort of question in the F9 Ask the Tutor Forum, and not as a comment on a lecture )

Did you read my previous reply? Because I asked you not to post this sort of question as a comment on a lecture, and also because it is exactly the same reason.
The price in the question is 95. The question says that interest is about to be paid and therefore it is a cum interest price. The interest is 5, and therefore the ex interest price is 90.

Again, I do suggest that you watch our free lectures on this.

The videos are working fine, and so the problem must be at your end.
Please go to the support page – the link is above – and you should find a solution there.

They are enough to be able to pass the exam well, provided that you have a current edition of a Revision Kit from one of the ACCA approved publishers. They contain lots of exam standard questions to practice on, and it is vital that you have lots of question practice.

Arun says

Hi John,

I wanted to ask is there a direct or inverse relationship between the shareholders’ required rate of return and the market value of shares? Could you please illustrate this with the help of an example?

Thanks a ton!

John Moffat says

The market value is the present value of future dividends, discounted at the shareholder required rate of return

This is all explained – with examples – in the lectures that go with Chapter 15 of our free lecture notes.

(The lectures are a complete course and are supposed to be watched in order!)

sayma says

Hello sir

I have just startrd watching this video and I feel my heads going round in circles.

sir ealier you have stated that the MV of shares is determined using the future expected divdends & Re. But in this video, u hv said that the Re is determined using the future expected dividends and the MV quoted in the S/E.

but how can we do that if we need the Re in the first place to determine the market value?

or is the application of growth model just suitable for unquoted co.’s?

And if so, how is the share price of quoted co.’s determined?

Also,since one of the many limitations of the growth model is that the Re used in the computation of MV is that it is just an estimate,i figured that there must be a certain way of estimating it rather than just working the formula backwards.

I fear I am getting everything jumbled up

Abhishek says

My opinion:

if think you have to take it like this, in the first lecture on valuation of securities, you were shown how to calculate mkt price, which in its simplest way is the dividend divided by the expected rate of return (Re).The unknown was the market price.

As stated in page 83 of lecture notes,mkt price is determined by shareholders, the price at which they wud be prepared to pay on stock exchange.

Lets say you have a share of $1 nominal value, which gives you a dividend of 20c the year. The rate of interest is 10%. At what rate would a person normally agree to buy your share at most? Answer is nearly to the same rate at which you would be earning interest at the bank. I dnt think you would sell it for 1$, because you are getting 20% off it (20c / $1). $1 would earn an interest of 10c at the bank. People would not buy your share for $3, earning just 20c as dividend coz the bank would earn the an interest of 30p.

At most, people would be willing to pay X$ which would earn them a dividend of 20c at a rate of return similar to the bank (10%), hence, would pay 20c/10% = $2 at most for the share because it would get them equivalent return to bank.

Now you yourself, would you be ready to pay $3 for a share which earns you 20c whilst the bank offers an interest of 10% per annum? Answer is obviously no. However, if the share is 1.95$, you would probably go for the share instead of the bank. The maximum amount you would be likely to pay would be the equivalent of rate of interest earned throuh the bank which is $2.

The rate of return is not to be confused with the rate of interest. People may expect a higher return by investing in shares as compared to bank interest, given the risk associated.

Now, if you know the market price and the dividend, just find the unknown, that is the expected rate of return

Hope this answers your concerns

sayma says

It does actually:)

it was the bank interest rate portion I was missing out.

let me still clarify- so what your saying is-the share price is decided keeping in mind the int. rate and what rate of return the shateholders are likely to require because of the present interest rate. And then setting a price thats not going to make the co. lose out but is attractive to shareholders at the same time right?

thanks a bunch!!!!

John Moffat says

This sort of question really belongs in the Ask the Tutor Forum rather than as a comment on a lecture!

Shareholders determine the price of the shares based on the dividends they expect and the return they require.

For a quoted company we know what the share price is, and so we can ‘work backwards’ to determine what return shareholders are requiring and therefore what the company needs to give them (and therefore what return the company needs to earn from projects in order to satisfy the shareholders).

halisyinanc says

Thank you John , this is great help!

claudia1 says

Dear Sir,

Can you help me with this question?…….

A Co has just paid a dividend of 23 cents and it is expected to remain the same next year and increase by 3 percent thereafter. What is the current market value of the share if the required return is 12 percent? The answer given is 2.56….I don’t get it.

John Moffat says

In future please ask questions like this in the Ask the Tutor Forum – not as a comment on a lecture!

We use the formula from the formula sheet: (Do(1+g))/(Re – g)

The top bit on the formula (Do(1+g)) is next years dividend which is usually the current dividend times (1+g). However in this question, next years dividend is 23c and not 23c plus growth.

So it becomes 23/(0.12-0.03) = 256 ($2.56)

aliimranacca007 says

In 1998 32000

in 1999 31000

there is no growth here goes down…

Is there no any effect on solution .i.e always use same formola wheather grow or goes down?

John Moffat says

I assume you are referring to example 4.

Although from year to year the growth may be positive or negative, we are after the average growth per year over the whole period. This will always be positive in the exam.

The only relevant figures here are 28,000 and 33,000 – the earliest and latest dividends.

Iryna says

H John I am puzzled practice question 12 C in the answer market value is 78 how did we came to that . Please advice

John Moffat says

I assume you are referring to the market value of the debentures.

The price given in the question is 90, but since interest is about to be paid this is a cum interest value. We need the ex interest value which is 90 – 12 = 78.

(In future please ask this sort of question in the F9 Ask the Tutor Forum, and not as a comment on a lecture )

Iryna says

Hi the same question on F9 practice question 12 d in answer calculations Kd how did we worked out market value $90

John Moffat says

Did you read my previous reply? Because I asked you not to post this sort of question as a comment on a lecture, and also because it is exactly the same reason.

The price in the question is 95. The question says that interest is about to be paid and therefore it is a cum interest price. The interest is 5, and therefore the ex interest price is 90.

Again, I do suggest that you watch our free lectures on this.

Promise says

Sorry Sir my calculator is giving me different answer for growth rate.I get 4.34248 before deducting 1

John Moffat says

I assume that you are referring to example 4?

If you are, then I don’t think it is the fault of your calculator but probably you pressing the wrong buttons

(1 + g) = fourth root of (33000/28,000) = fourth root of 1.178571

To take the fourth root, either use the relevant button or take the square root twice. In either case it comes to 1.04193.

(It could not possibly come to 4.34248!!)

fahim231 says

hi sir i am confused regarding the growth forumla…….you say after 1 year it will be (1+g)? so after 2 years would it not be (2+g)?

Thanks in advance

John Moffat says

No – it would not!

Imagine it is 100 now, growing at 10%

In 1 year it becomes 100 + (0.10 x 100) = 110 (or 100 x 1.1)

In 2 years it becomes 110 + (0.10 x 110) = 121

This is the same as 110 x 1.10, which is the same as 100 x (1.10)^2

Try it on your calculator and see.

Every time we add on 10%, we multiply by 1.10

If we do it twice, then we multiply by 1.10 twice.

Milan says

So Sad! I can’t download ACCA video lecture. No option to download. Why? Plz help someone.

opentuition_team says

You can watch lectures on line, as many times as you want, FREE!

John Moffat says

It is the only way that we can keep this website free of charge.

ngao says

I have been trying to listen to some videos but am failing what could be the problem?

John Moffat says

The videos are working fine, and so the problem must be at your end.

Please go to the support page – the link is above – and you should find a solution there.

ngao says

Will try and do that. Thanks

ngao says

Are video lectures and class notes enough to make one pass?

John Moffat says

They are enough to be able to pass the exam well, provided that you have a current edition of a Revision Kit from one of the ACCA approved publishers. They contain lots of exam standard questions to practice on, and it is vital that you have lots of question practice.