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Dear Lisa,
I watched one of the Topic Explainer videos on YouTube (Business and Asset Valuations) wherein Jo Tuffil shared a question on convertible debt.
The question clearly stated that the shares are “currently trading on an ex dividend basis, ” meaning the share price is ex-div.
However, I’m curious about what to do if the share price is cum-div in a convertible debt scenario.I am assuming that if I use the cum-div price, the dividend will be effected in the growth.
Please help with clarity on this.
In a convertible debt scenario, if the share price is cum-div, it means that the price includes the value of the dividend that is about to be paid. Therefore when using the cum-div price, you would indeed factor in the dividend when calculating growth, as the cum-div price reflects the current market value of the shares plus the upcoming dividend.
So, if you are using the Dividend Valuation Model you would typically use the cum-div price to account for the dividend that will be received by the shareholder.
The formula for the DVM would include the current dividend plus any expected growth, which would be relevant in this case since the cum-div price reflects the value of the shares before the dividend is deducted.
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