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In part aii)for the call option valuation we deduct the divident stream from the current exdiv share price,but why do we discount it at the risk free rate and not the ke-g?
Is it always to be discounted by the riskfree rate or only in this qs?It is an assumption on the basis that the dividend has remained constant and is therefore assumed to be risk free in that sense.
What if the dividend is not constant?how would we calculate the Pv of the share excluding that dividend?
Thanks alot Sir
You are a superb tutorDear John,
Can you please tell me why the dividend have to be discounted? Is it not present value?
Thanks a lot and looking forward to hearing from you.
It is because the option is exercisable in 1 year, but in 1 year there will be a dividend payable and so the present value of the dividend in 1 year is included in the current share price.
Can someone please post the answer or link to the answer of this qs. I am unable to find the solution anywhere. Even the latest revision kit doesnt have it.
This is such an old question that it is no longer on the ACCA website – the examiner has changed twice since this question was asked, and the current examiners style of question is different. That is why it is no longer in Revision Kits.
You might find it somewhere by searching using Google or the like. To post a link or to post the answer here would be illegal because of ACCA copyright (and the ACCA is very strict on breaches of copyright).
Sorry 🙁
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