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  1. Sir,
    Suppose the company wanted to increase its market value of shares so they decided to pay more dividend than the usual and thus resulted to increase in its market value. Now as they are paying more dividend they will have less retained earnings to invest for companies Future growth.

    So does that mean “increase in its market value doesn’t always mean the company is performing well and expected growth in the future” ?

    Thankyou.

  2. Hello Sir,

    At 27.40 in the video I understood why you multiplied 20 cents with 0.870 as it was year 1. However, for year 2 and 3 you multiplied both the second year’s 20 cents and third year’s 189 cents with the same discount rate of 0.756 which in my opinion should’ve been for year 2 and for year three shouldn’t 189 cents be multiplied by 0.658 instead of 0.756.

    And lastly thankyou always for solving our problems. 🙂

    • The answer is correct.

      You are happy with the discounting of the 20c at time 1 and the 20c at time 2.

      With regard to the dividends from time 3 onwards, suppose for a moment that a dividend had just been pay (i.e. time 0) and dividends were growing at 4%. You would use the formula and get a PV now (time 0) of 189. That would be correct for dividends from time 1 onwards.
      Here, instead of it having been 20c now it was 20c in 2 years time – i.e. 2 years later. SO using the formula gives 189c two years laters as well. At time 2 instead of at time 0.
      So then the 189c needs discounting for 2 years.

      Make sure you are sorted on this, because it is quite a common ‘trick’ in the exam.

      • Sir, since you mentioned that ‘189c needs discounting for 2 years’ so then shouldn’t we use the rate from the annuity table instead of the pv table?

        Might be a dumb question, but just to clear the doubt, because you said to ensure that im sorted on this topic as its a common trick played by the examiner.

      • No. Using the dividend valuation formula gives an equivalent amount at time 2 and we then discount for 2 years using the normal PV tables.
        (Using the annuity tables would be treating it as though it is 189 in each of years 1 and 2, which is not the case.)

  3. Hi sir,

    Does the Dividend valuation model: “The MV is the PV of future expected dividends, discounted at the shareholders required rate of return” applies to unquoted companies as well?

    Does the same dividend valuation model formula Do (1+g) / re-g is called Gordon growth model ?

    Thanks,

  4. Hi Mr. Moffat,

    In the notes of this chapter, we have heading “The valuation of equity – non-constant dividends” but there is no example of non-constant dividend below the notes anywhere. There is only one example which is for constant dividend only.

    PS: My mistake, I posted it somewhere else before.

    Thanks,

    • But that section carries on to explain about non-content dividends – read it carefully and look at example 5 and example 6!

      (I hope you are watching the lectures – the lecture notes should not be used on their own because it is in the lectures I explain and expand on the notes.)

      • Yes, I am watching. I am not sure that questions like below is in the syllabus of F9 or not. If it is in the syllabus, can you please help me solving it?

        The current dividend on a stock is $2 per share and investors require a rate of return of 12%.
        What is the price of the stock if dividends are expected to grow at a rate of 20% per year over the next three years and then at a rate of 5% per year from that point onwards.

        Thanks,

      • Yes – it is in the syllabus and is often asked.

        But you must ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.

  5. Hi John,

    As obvious as it seems but it just didn’t make sense to me as to why we added the dividend about to be paid to the ex-dividend amount to calculate cum-div. I was going to subtract it so my concept must be totally wrong there. Could you explain?

    What I also didn’t understand is that in the case of Ex-Div when we say that the dividend has just been paid then the shareholders must immediately receive the dividend, so why in that case the dividend will be paid after a year.

    Thanks.

    • Lets assume a share is valued on an ex div basis at $100 based on FUTURE dividends and growth etc. Well if a dividend has just been paid, we have missed it, so we look to value the share based on the normal ex div method. Now lets say that the same $100 share is carrying a dividend which is just about to be paid…lets say the dividend due is $2. Well now the share is still valued at the $100 based on its future dividends, but that share is also carrying and extra $2 value because of the due dividend. So the dividend about to be paid is added to the ex div value. I hope this makes sense, and I hope John does not mind me offering help.

    • If you buy a share cum div then you will then immediately get the current dividend, whereas if you buy it ex div you will not get the current dividend (because it has already been paid) and will have to wait a year to receive your first dividend.
      Therefore you will be prepared to pay more if you are buying a share cum div.

  6. hello sir

    i was just looking at the papers and came across this question; TKQ Co has just paid a dividend of 21 cents per share and its share price one year ago was $3·10 per share. The
    total shareholder return for the year was 19·7%.

    Im confused as none of the formulas work on this , can you please clarify

    • It is not using a formula from the formula sheet.

      The shareholder return for the year is the dividend plus the increase in market value, as a percentage of the market value.

      So the total return here is 19.7% x 3.10 = 0.61.
      Sine the dividend is 0.21, the market value must have increased by 0.40.

  7. Hi John,
    I am a little confused between e.g #2 and #4 which basically asked the same question and obviously had the same answer. I am trying to understand your explanation about using the present value to find the market value in #4. Was this to show the two ways of getting the same answer?

    • I don’t understand why you are confused.

      If you have finished the lecture you will realise that usually we simply use the formula that is given in the exam. However, given that 50% of the exam is writing as opposed to arithmetic, it is desperately important that you understand the logic behind what we are doing and the premise that the market value is the present value of future expected dividends.

  8. June 2008 past paper Ques 2 (d)
    The P/E ratio of 7.5 is used to determine the Present Value of $720,000 of the after-tax savings (96,000 x 7.5 = $720,000).
    How is it possible to use the P/E ratio to determine the present value? I think i understand “why” we use it, i just didn’t realize the P/E ratio could be used to determine the PV.

    I apologize for asking this question here but i couldn’t find the Ask the Tutor page.

    • He should not have used the term present value. The P/E ratio does not replace discounting and does not give a present value in that sense.

      What he means is that the value of a share (using the P/E approach) will be the EPS x P/E ratio.

      So……if the earnings increase the the market value increases.

      (PS To find the Ask the Tutor forums, click on ‘forums’ on the bar at the top of this page, and then click on ‘Ask ACCA Tutor’. Then you will get a list of the Ask the Tutor forums for each paper)

  9. Mr John, I have got a question – Why is that when we have a question that includes shares at par of say 25c we have to divide the share by 0. 25 in order to turn it into a $1 share? (to calculate rights issue for example) and then we want to include the shares in the balance sheet, we multiply by 0.25 in order to turn it again to a share of 0.25c!

    Sorry if this is a dumb question, this point always confuses me, I have no idea why do we need the share to be a $1 share? Why not just perform our calculations on a 25c share?

    Thanks,

    Maha

    • We do perform our calculations on 25c if that is the nominal value.

      What I am guessing you are confusing it with is that quite often in questions you are told the total nominal value of the shares (an extract from the Statement of Financial Position) and we need the number of shares.
      So…..if the nominal value is 25c a share and the SOFP figure for share capital is $100M, then $100M is the total nominal value of all the shares and so there must be 400M shares of 25c.

      We never turn them into $1 shares – ever 🙂

  12. Why is it only the future expected dividend that effects the theoretical value of the share price? Why wouldn’t the expected capital gain of the share be a consideration too for instance? Thanks.

    • In theory, it is the expected dividends that affect the share price. If the dividends are expected to grow, then over time the share price will grow (and therefore we have a capital gain). However the only reason for the capital gain is because of increased expectation of dividends. (All in theory, obviously 🙂 )

  13. Could you help me understand why share prices on the stock exchange keep changing every day but for the same companies? for sure I know that dividends from what we have learned is a factor but not paid daily I guess and so is interest rate.

    • The share price is based on what investors expect in the future.
      So although dividends are a factor, it is expected future dividends.

      News about the company comes out all the time (and also about the state of the economy – which affects companies).

      If there is news that makes investors expect the company will do better in the future, then they will be prepared to pay more for the shares – and so the share price will increase.
      If there is news that makes investors expect that the company will do worse in the future, then the share price will fall.

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