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.

The lectures are a complete free course and the idea is to watch all of them in chapter order (alongside our free lectures notes that do with the lectures).

Dear sir you said market values are always ex div. Yet in example 3 you added $1.25 to $0.15 dividend. In exam, the market value we have to give would be ex div, right?

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?

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?

If the growing dividend was from 1 to infinity then the formula would give the PV now – time 0. Since the first growing dividend is in 3 years time, which is 2 years later than had it started in 1 years time, then the result of the formula is a PV two years later as well – i.e. time 2 instead of time 0. So we discount for 2 years to get the PV ‘now’.

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?

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?

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.

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

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.

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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whtan95 says

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?

John Moffat says

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.

rishabbohra98 says

Sir for the last few chapters starting from this I’m just planning to watch your lectures as its easy to understand. That would be enough right?

John Moffat says

I don’t understand what you mean.

The lectures are a complete free course and the idea is to watch all of them in chapter order (alongside our free lectures notes that do with the lectures).

ayeshatabani says

Dear sir you said market values are always ex div.

Yet in example 3 you added $1.25 to $0.15 dividend. In exam, the market value we have to give would be ex div, right?

ayeshatabani says

ok.. I got it, Its going to be mentioned whether they want ex or cum div

John Moffat says

you are correct 馃檪

ujun says

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?

John Moffat says

You would calculate the growth rate of total dividends (rather than dividend per share).

ujun says

So would you say that a limitation of using the growth rate model is that share capital remains constant?

John Moffat says

It is not a limitation of the model, maybe a limitation of the answer we use depending on whether it was calculated correctly or not 馃檪

ujun says

?

Thank you sir

John Moffat says

You are welcome 馃檪

debbie says

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?

John Moffat says

If the growing dividend was from 1 to infinity then the formula would give the PV now – time 0.

Since the first growing dividend is in 3 years time, which is 2 years later than had it started in 1 years time, then the result of the formula is a PV two years later as well – i.e. time 2 instead of time 0.

So we discount for 2 years to get the PV ‘now’.

debbie says

thanks john

John Moffat says

You are welcome 馃檪

ilonadevereaux says

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

John Moffat says

The question says that the growth rate is 4% (I assume that you did download the free lecture notes before watching the lecture?)

amana1999 says

sir do u have the lecture on business valuations and market efficiency?

John Moffat says

Yes. Work through the notes and lectures in chapter order and you will find there are lectures on everything.

maisunny says

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?

John Moffat says

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.

maisunny says

Thank you so much. I will review all of your lectures. Best wishes for you, sir!

John Moffat says

You are welcome 馃檪

barre44 says

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

John Moffat says

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

barre44 says

Thank you, you always make things look very simple!

John Moffat says

You are welcome 馃檪

barre44 says

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

John Moffat says

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.

elo says

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.?

John Moffat says

You can find lectures working through all the questions in this exam linked from the following page:

https://opentuition.com/acca/f9/acca-f9-revision-kit-live/