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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.
It says the 20c dividend in one year
it says 20c in the 2nd yearthen it would grow by 4% in year three onwards
yr / Div / Timing / Value
1 / 20 / 1 / 202 / 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 & 2yr / Div / Timing / pv / Value
1 / 20 / 1 /20 / 0.870 / = 17.42 / 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 / 204.55But the dividend didn’t grow in year 1 or 2 so its not appropriate to do it this way
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