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acca says

Please can you advise why sometimes in Ke=Rf+Be(Rm-rf), Rf is deducted from Rm, sometimes nit. I sm very confused!

John Moffat says

Rf is always subtracted from Rm !!!

Rm is the market return. What is confusing you is that Rm – Rf is the market premium, and questions sometimes tell you the market return but sometimes tell you the market premium instead.

I do explain this in the lectures.

acca says

Thank you so much for the nice and quick explanation

Elena says

About the formula

Ke=div*(1+g)/P+g

I wonder why is g added as a second augend.

Could it be explained in this way?

The sh.holders want to have growth not only for the dividends but for the whole business, i.e. for the P (price of a share), so the total sum of a year return = div(1+g) + P*g. The percent of return = Ke = total_growth / P = we come to the initial formula. Is it correct?

John Moffat says

Not really.

It is a rearrangement of the formula for the market value (Po) which can only be properly explained by proving it. It is easy to prove if you are good at maths.

However, both explaining and proving it are outside the syllabus 馃檪

avnigilda says

Hi John,

Question 6 part b needs calculation of cost of equity. The question has given a MV of $2.80 and EPS of 32c. Can’t we use the formula for cost of equity = 1/Price earning ratio ?

John Moffat says

No – that doesn’t give the cost of equity!! That gives the earnings per share, which is something different.

Have you not watched the free lectures on this?

ayeshatabani says

Hi John,

The answer to example 4 is coming negative -0.48. It’s not coming 4.19%. I have tried doing it multiple times!

Can you please check this?

marslan says

g=(33000/28000)^1/4 -1= 1.0419 -1= 0.0419= 4.19%

John Moffat says

Thank you Marslan 馃檪

Giuseppe says

Ayeshatabani, If the value has grown during the time (from 28k to 33k), how is it possible the the growth is negative? Must be positive! 馃檪

claudia1 says

Thank you sir. I was wondering though….why we need to plus the growth, when it was already added to the dividend,,,,do x 1+g for next year’s dividend. Thanks

John Moffat says

Because dividends keep growing after next years dividend. To explain fully would require me to prove the formula – it is not difficult to prove but would be wasting time given that you cannot be asked to prove it in the exam 馃檪

said1988 says

Hello Sir,

Thank you for the lectures,

I have a question concerning the example 6 part C: Market value per share in 2 years time:

Is ‘g’ dividend growth equal to the growth in share price?

Thank you again

said1988 says

I just need more explanation please

John Moffat says

Yes. Because the market value is the present value of future dividends, the market price will grow at the same rate as the growth in dividends.

said1988 says

It makes sense, thank you sir

John Moffat says

You are welcome 馃檪

techie says

Thanks a lot.

John Moffat says

You are welcome 馃檪

wincott2 says

I鈥檓 a bit unclear how you got the answer for the example 3.1 under chapter 6. (1+g) = 4 root (33,000/28,000).

John Moffat says

But I explain this example in the lecture! If you are asking how to calculate a fourth root, then you need a scientific calculator.

wincott2 says

Thanks Sir I used the wrong process.

John Moffat says

You are welcome 馃檪

amaldev5125 says

Hi,

1) Discounting dividend give current value of company.

2) Discounting entire cash flow also give current value of company.

So my question is how the dividend valuation model and discounted cash flow model give same result when cash flow include dividend also?

John Moffat says

Discounting dividends at the cost of equity gives the value of the equity.

Discounting the free cash flows at the WACC gives the value of the company – equity plus debt.

amaldev5125 says

What if the cash flow is after interest that is cash flow to equity?

John Moffat says

Yes, and this is all explained in later lectures on the valuation of mergers and acquisitions – I do not know why you are asking this under a lecture on cost of capital!

amaldev5125 says

In that lecture cash flow to equity is discounted with cost of equity, dividend valuation also with cost of equity so I got confused.

I got this doubt, when I watched this video. Sorry and leave it.

Thanks for the reply

John Moffat says

You are welcome, and no problem 馃檪

haroon says

I don’t understand how the 110 is appearing in example 8 part a of chapter 6….plz help

kelsnjoku says

Hello sir,

In a situation where dividend grows at a given rate for a given number of years, who can cost of equity be computed?

John Moffat says

Given that the dividend valuation formula is working backwards from the premise that the market value is the present value of future expected dividends discounted at the shareholders required rate of return, it would be illogical for shareholders to be expecting dividends as you state (and could not happen in the exam).

Revising this by watching the relevant PM (old F9) lectures may help you.

Most commonly in the exam we would be using CAPM to calculate the cost of equity anyway (and not using the dividend valuation formula.