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Cant co has ke of 10%
Dividend are as follows
Year 1= 0
Year 2= .25
Year 3= .50 increasing @ 3%
Find Po?I got stuck in this question then I watched your lectures on valuation of security example 7 and applied same mechanism.
I initially discounted .25 DCF 2 yrs 10%
.25*.826=.2065. (W1)Then used DVM
.50*1.03/.10-.03= 7.3571
Discounted @ 10% 3yrs = .751
=5.521. (W2)Po= 5.7275
Answer is $ 6.11.
Sir,
Where did I went wrong?You have gone wrong when using the formula on the $0.50 increasing.
If the first growing dividend is in 1 years time, then the formula gives the PV ‘now’. Here, the first dividend is in 3 years time (which is 2 years later than in 1 years time) and so the result of the formula is the PV two years later i.e. at time 2, and so needs discounting for 3 years and not 3 years.
In addition, if the first growing dividend were in 1 years time then the numerator in the formula ( Do(1+g) ) is the current dividend plus growth which is the same as the dividend in 1 years time.
Here, everything is moved forward by 2 years (as explained above) and so $0.50 is the dividend in three years time and the numerator in the formula is just 0.50 (and not 0.5 x 1.03)I do not think that you are watching my free lectures because I do work through and explain examples like this one.
Okay Sir I found it a bit difficult but now I understood..
I have watched all of your 70 lectures on FM .
But I have forgotten a bit.. Regardless it’s clear now
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