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Valuation of equity

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Valuation of equity

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by LMR1006.
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  • Author
    Posts
  • December 6, 2023 at 10:17 pm #696282
    SolapeJ
    Participant
    • Topics: 2
    • Replies: 0
    • ☆

    In the last question in the lecture video, where the dividend if first constant for two years and then grows by 4% after. Why do we use the market value for the second year as part of the dividends to discount to get the value of the overall share? I thought it was only expected dividends we would use because 189c is not an expected dividend, it is the market value for year 2.

    December 7, 2023 at 11:12 am #696327
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1511
    • ☆☆☆☆☆

    It says the 20c dividend in one year
    it says 20c in the 2nd year

    then it would grow by 4% in year three onwards

    yr / Div / Timing / Value
    1 / 20 / 1 / 20

    2 / 20 / 2 / 20

    3 / 20(1.04) / 2 / 189

    You are calculating the market value of a share that has had constant dividend for 2 years and the is expected to grow at 4% in perpetuity.

    ( 20* 1.04) / (0.15-0.04) = 189 from the beginning of year 3 onwards
    Because it’s a delayed perpetuity you have to adjust by the PV factor for 15% in year 1 & 2

    yr / Div / Timing / pv / Value
    1 / 20 / 1 /20 / 0.870 / = 17.4

    2 / 20 / 2 /20 / 0.756 / = 15.1

    3 /20(1.04) / 2 /189 / 0.756 / = 142.88

    This gives a market value of $1.75

    Otherwise, it would have been
    MV(xd)
    1/ 20.80 / 189.09
    2 / 21.63 / 196.65
    3 / 22.50 / 204.55

    But the dividend didn’t grow in year 1 or 2 so its not appropriate to do it this way

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