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Hi tutor,
I can’t quite understand question 4 part (a).
Dividend growth model was used to find the value of company at the end of the second year for not paying dividends by, taking dividend payment at the end of 3rd year and then discounting the value in ‘year 2’ to current terms.
Why is the capital value a year 2 present value instead of a year 3 PV?
I did a similar question from the June 2012 paper qn4 and the solution discounted the value at year 3 to present terms indeed.
Also in part (d), factors to be considered in choosing between bonds, shares and venture capital were required and i wrote:
-current gearing level
-ability to make interest payments
-dilution of balance of ownership and control
-availability of finance
Which all were not included in the solution. Would these be correct still?1. Normally when we use the formula Po = Do(1+g) / (r – g), we get the MV now, and Do(1+g) is the dividend in 1 years time.
In the answer, the examiner has used Do(1+g) as 25, which is the dividend in 3 years time, which is 2 years later than the dividend in 1 years time. Therefore the formula gives a market value 2 years later as well i.e. a MV in 2 years time.
So to get a MV now we then need to discount for 2 year.2. You answers are valid and would get credit (but do read the examiners answer because they are also valid points worth understanding)
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