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  1. Hi John.

    Example 1 says, Alpha plc has i issue $1 shares and has just paid a dividend of 20c per share. Dividends are expected to remain constant,. Shareholders required rate of return is 10% p.a.
    The current market value as we have calculated = $2.

    1) Sir, what does it mean by $1 shares? Is it the book value? how does it different from market value of the share?

    2) why do the shareholders can decide the rate of return whereby it is the company to decide the amount of the share, for eg 20c per share? Isnt that the required the rate of return does not affect the company’s decision to pay dividend?

    • The $1 is the book value (or nominal value or par value). The market value is the price at which shareholders are prepared to pay for existing shares to buy from each other on the stock exchange.

      If shareholders require a higher rate of return and the company does not then pay a higher dividend, then the share price will fall. As stated in earlier lectures, it is the job of the company to maximise shareholders wealth i.e. to maintain and increase the share price.

  4. Hi John.
    Your lectures are enlightening.
    If I were to determine the growth rate using dividends paid in years 1-5 and more there was a 1 for 3 bonus issue in year 3, how would I go about this? How do I factor in the bonus issue in my calculations?

  5. hi john,

    I am a little confused with the timing related to example 7. I understand that year 1 and year 2 has no dividend growth and it increases in year 3 by 4%. however, in the calculation you had discounted 189c at year 2 using 15% instead of year 3. could you please clarify this for me?

  6. Dear Sir

    Thank you for these lectures they are fabulous. Quick question on the last example – I did not understand where you go the growth rate from i.e. the .04?

    Please advise.

    Thank you

  8. Dear John,
    In practice, if want to value a security for example has dividends paid in last 10 years: 2, 1.2, 1.8, 1.8, 1.8, 2.2, 3.3, 3.7, 5, 5.2, what should i do?
    We can use CAPM to estimate discount rate? if can, beta is beta of this security (average?),
    Future expected dividends how to estimate? we can calculate g=ROE*retention ratio, but this g is different every year, so we use average?
    I understand the examples in text book, but in practice i am really confuse. Could you help?

    • For your first example you calculate the average growth rate and use that in the dividend valuation formula.

      You use the equity beta to calculate the cost of equity, then use this to calculate the WACC.

      You either use past dividends of rb growth to estimate growth. It is shareholders expected growth that we need – that will be an average,

      All of the above is covered in my lectures and I do suggest that you watch them all.

  9. Sir,

    One more question you may clarify is that in example 7 when calculating discounted present value to get the MV you used the Dividend of 20c for the first and second year as there is no growth and then instead of using 0.2*1.04 as the dividend started growth, you used 1.89 which I thought is the Market price.
    Why on earth you are discounting the MV in line with the dividends to get the cum.div.

    Thanks

    • Firstly we do not want a cum div value- I make it clear in the lectures that MV’s are always ex div unless told otherwise.

      When the first dividend is in 1 years time, the formula gives the market value ‘now’.
      Here, the first of the ‘growing’ dividends is in 3 years time, which is 2 years later than in 1 years time. So the result from the formula is also 2 years later – i.e at time 2 instead of time 0.
      Therefore we need to discount for 2 years to get a value now.

      I do explain this in the lecture and I do suggest that you watch it again – it is very common in the exam 馃檪

  10. Sir,

    I thought the cum.Div should be included the dividend about to be paid not the one just paid.
    In example 5 didn’t 30c is the dividend just paid which means that this 30c was already paid.

    and so MV = dividend already paid 8 1+growth/re-G

    So when finding Cum.div how come you use the 30c which we already said was the dividends already paid and then saying its about to pay

    • We do not want the cum div value, the formula gives the ex div value and since they have just paid the current dividend it is the ex div value that we want. If we had been required to calculate the cum div value, then we would have added 30c to the result from the formula.

  11. Kindly assist with workings of mcq 15
    sept 2016

    Q:D CO has $5m of $0.50 nominal value
    it recently announced a 1 to 4 rights issue at $6per share. ..it’s share price on announcement of the rights issue was $8 per share.
    what is the Theoretical value of right per existing share.?

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