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Sir, in June 2013 examination question no 4 had a question asking to find the value of a company with dividend growth model, but the issue was that the company suspends dividend for 2 years and then makes a divided payment of 25 cents and subsequently growth of 4%, it also says recent dividends have shown a growth rate of 3%. So if such a question comes on divided being cut for few years how should we do the calculation? The answer provided online cannot be understood.
We use the dividend growth formula that is given in the formula sheet.
However that formula assumes that the next dividend is in 1 years time (Do x (1+g) is the dividend in 1 years time).
If the first dividend is later – i.e, 2 years or 3 years later – then the figure resulting from the formula will not be the PV at time 0 but will be the value 2 or 3 years later.
So we then need to take the result of the formula and discount for the relevant number of years (at the shareholders required rate of return) to get a value ‘now’.
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