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    • There isn’t really anything called the “constant growth model”.

      The market value of equity is always determined by the future expected dividends, which necessitates estimating the expected future dividend growth.

      To estimate dividend growth we are either given information about dividends (which is the case here – we know the current dividend and the dividend in one years time, so all we can do is assume that the growth is expected to continue at the same rate as the growth over the coming year) or we are given information about the retention policy and the return on reinvestment in which case we can using Gordon’s growth approximation to estimate the growth. Using Gordon’s growth approximation is rare in the exam, and is not possible here because we do not know the retention policy or the return on reinvestment.

      All the above is explained in full in the free lectures (which cover the entire syllabus for F9).

    • The ACCA removed all papers before 2010 last week.

      However they are still on the website, but hidden. If you search in Google you should be able to find it.
      We are not able to publish it on this website because of copyright rules.

      (However, you really should not be taking the exam without having a Revision Kit from one of the ACCA approved publishers, and you will find the question there. Practice on exam standard questions is vital and you should be working through every question in your Revision Kit.)

  4. hello plz solve this and show your working
    annual sale 20 m account recevable 5m and working capital finance by 12% assume 365 day
    what is the annual finance cost saving if the managment reduces the collection period to 60 days ?
    please

    • Different guesses will give a different answer (because the relationship is not linear). That is no problem. However it should not be a lot different – if you are more than 1% different then you have almost certainly made a mistake.

  6. Thank you for what you and your colleagues are doing! It is priceless. Have you ever thought to create some premium users, who would like to pay a subscribtion or paper fee and to be allowed to access some premium material and have adds-free page?
    My question relevant to this lecture would be: payout ratio given in question is irrelevent for any answer. How do you think why examiner gives this info? Is it to make some confusion, to make us think about gordon’s growth approximation g=br while calculating div growth rate as example?
    Thank you and have a lovely day.

    • It is because of part (d).
      Although you don’t need to use the actual figures, the point is that the company does have a current dividend policy. You are then asked to discuss whether a change in policy will have an affect.

    • I will record answers to June 2012, but it will not be until the winter break from lectures.

      The point is however, that the market value of shares is always the present value of the future dividends discounted at the shareholders required rate of return.

      If there is a constant rate of growth, then the formula on the formula sheet will do this for you.

      The problem in 2012 is that for the first two years there is not a constant rate of growth, so for those years you have no choice but to use the basic rule and to discount the dividends for those years. Later, when there is constant growth, then the formula will work and will give the present value of the dividends, but because it starts only after two years we need to discount by another two years to get the present value of them now (which is what we need).

      • i still dont understand are you sayin tha i should multiply 500000 by 0.797? and 1000000 by 0.712 and then add them together..please help me because i find this certain question very tough. many thAnks

      • The 0.797 and 0.712 are the discount factors (from the tables) at 12% (the shareholders required rate of return – which is the same as the cost of equity).

        I have realised (I think) that you are trying to understand the answer in one of the Exam/Revision Kits. If you look at the examiners own answer (you can find it on the ACCA website) then you might actually find it easier to understand because he explains it quite well.

    • Hey,
      As we know market value is the PV of all the future dividends so calculate PV for Year 1 which will be zero similarly for year 2 (500000*.797) and year 3(1,000,000*.712) don’t forget discounting at 12% and for year’s beyond year 3 use growth model as usual. Add all the three figures up you will get your answer

      • No – there is no current dividend. However that formula only applies when there is constant growth.
        Here there is only constant growth after two years – so you can use the formula then (but you then have to discount for two years because it starts two years late).

        For the earlier dividends you have no choice but to discount the dividends individually.

        As I wrote before, the market value of a share is the present value of future dividends discounted at the shareholders required rate of return. This is really what the formula is doing, but only when there is constant growth.

        If you have not already watched it, then I do suggest that you watch my lecture on the valuation of securities where I explain all this.

  10. its very important for us and very helpful to watch the solutions.Just a simple thank you would not seem enough.Though this lesson is quite demanding and difficult and it should be more up to date with more lectures on how past exams papers should be solved ..Please upload more when you can

    • Our purpose is to provide tuition free of charge to help people to pass the exams. We make it clear that you must practise questions, and to that end must get hold of an exam/revision kit from one of the approved publishers.
      The site is up-to-date. We review and amend the lectures and course notes every six months (which none of the approved publishers do).
      We also produce our answers to past exams – you will obviously have looked at our answers to the June 2013 exams.

  13. I am revising using KAPLAN exam Kit – December 2007. About question 4. Where the answer says that current interest in Overdraft 400,000 – 350000. 50000. I don’t understand where the Overdraft is coming from…..

    • Do you mean that it is a question in the 2007 Kaplan kit? I only have the current Kaplan exam kit and so you will have to give me the name of the question. If they still have it in their current exam kit then I will be then able to help you.

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