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Good day, Sir Moffat. I had a question regarding example 6 c of chapter 17. You have stated that the market value of a share is the present value of expected dividends discounted at required return. in 6c, to determine the market value in 2 years time, we multiply the market value of present day with the growth rate^2 >> (2080 * 1.0675^2). this might be a silly thing to ask, but to come to the present value 2 yrs from now, shouldn’t we be unwinding $2.80 using the discount rate of 14.375% >> (2.80*1.14375^2)? I do understand the explanation you have provided in the lecture but I am still confused as to why there in nothing regarding unwinding of discount involved. Thank you for all the help you provide us. I deeply appreciate it.
There is no such expression in F9 as “unwinding of discount” and I do not understand why you should want to discount the current market value of $2.80.
The current MV (at time 0) is equal to Do(1+g) / (Re – g) (the dividend valuation formula given on the formula sheet).
The MV in 2 years time will be equal to to D2(1+g) / (Re – g).
Since D2 (the dividend in 2 years time) will be equal to Do x (1+g)^2, and everything else will be the same, then the MV in 2 years time will be the current MV x (1+g)^2
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