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April 29, 2020 at 11:11 pm
August 4, 2019 at 3:36 pm
Hi John, many thanks for excellent lecture. A question on Example 6 (c) – you estimated market value per share in 2 years time by growing the price at dividends growth rate, logic is clear (assuming the price will be driven by dividends growth only) = $3.19
I thought I should get the same result if I actually use Ke and G in Growth Model formula (which should be the same), the result is different for some reason: P(2 years) = 20*(1+0.0675)^2 / 0.1438 – 0.0675 = $2.99
Would you have a view on why its different, shouldn’t be different in theory (assuming price is driven by dividends growth only)
September 22, 2019 at 8:13 pm
Hi there won;t be any difference. You are looking at it right except a little calculation mistake. The right calculation is, P(2 years from now) = 20*(1+0.0675)^3 / 0.1438 – 0.0675 = $3.19
Reason for using (1.0675)^3 is as below: In growth model – to calculate market value of today, we use dividend in one year’s time [Do(1+g)], and therefore – to calculate market value in 2 years time, we need to use dividend in 3 year’s time [Do(1+g)^3].
I hope it explains.
February 17, 2019 at 9:14 pm
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
February 18, 2019 at 6:29 am
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.
February 18, 2019 at 9:55 am
Thank you so much for the nice and quick explanation
January 26, 2019 at 8:16 pm
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?
January 27, 2019 at 10:03 am
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 🙂
December 12, 2018 at 5:13 am
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 ?
December 12, 2018 at 11:44 am
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?
December 6, 2018 at 7:52 am
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?
December 6, 2018 at 3:38 pm
g=(33000/28000)^1/4 -1= 1.0419 -1= 0.0419= 4.19%
December 6, 2018 at 5:16 pm
Thank you Marslan 🙂
January 23, 2019 at 5:43 am
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! 🙂
October 26, 2018 at 6:50 pm
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
October 27, 2018 at 11:16 am
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 🙂
October 8, 2018 at 2:20 pm
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
October 8, 2018 at 2:22 pm
I just need more explanation please
October 8, 2018 at 5:50 pm
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.
October 9, 2018 at 12:01 pm
It makes sense, thank you sir
October 9, 2018 at 7:10 pm
You are welcome 🙂
September 14, 2018 at 7:43 pm
Thanks a lot.
September 15, 2018 at 10:21 am
September 1, 2018 at 5:54 am
I’m a bit unclear how you got the answer for the example 3.1 under chapter 6. (1+g) = 4 root (33,000/28,000).
September 1, 2018 at 9:57 am
But I explain this example in the lecture! If you are asking how to calculate a fourth root, then you need a scientific calculator.
September 1, 2018 at 12:17 pm
Thanks Sir I used the wrong process.
September 1, 2018 at 3:28 pm
August 18, 2018 at 9:07 am
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?
August 18, 2018 at 10:05 am
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.
August 18, 2018 at 10:14 am
What if the cash flow is after interest that is cash flow to equity?
August 18, 2018 at 11:07 am
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!
August 18, 2018 at 11:28 am
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
August 18, 2018 at 5:52 pm
You are welcome, and no problem 🙂
August 12, 2018 at 3:42 pm
I don’t understand how the 110 is appearing in example 8 part a of chapter 6….plz help
July 26, 2018 at 10:07 pm
In a situation where dividend grows at a given rate for a given number of years, who can cost of equity be computed?
July 27, 2018 at 7:05 am
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.
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