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Hi my Dear Tutor, I have just need your confirmation that I understood it correctly.
ex-div market value 8.30$
g=0.03
ke=0.12If I use 8.30=D0*(1+0.03)/0.12-0.03
D0=73 cents=0.73$-this is the value dividend in the past ?P0=66*(1+0.03)/0.12-0.03
P0=7.6$-this is the current market value of share?here 8.30 is the prior year’s market value and 7.6$ is the current year’s market value per share.based on 8.30$ i found prior year dividend.
did i correctly understand it?
if we go further here we can also find capital loss 7.6$-8.3$=0.7$-this part is not required for the question I just wrote it.
Using the dividend growth model (as (a)(i) requires), then Do = $0.66, g = 3%; Ke = 12%, and therefore Po = $7.55.
In theory this should be the actual current ex-div market value of the shares.
The fact that the actual current MV is given in the question as $8.30 means that either the shares are currently over-valued (and that the MV will therefore fall to $7.55) or that shareholders are expecting future dividend growth to be higher than the 3% it has been in the past (and that we have therefore used in the formula).The question is asking you to calculate what the share price should be using the dividend growth model, not to explain why the actual share price is different (although that would have made a good written part to the question 🙂 )
My Dear Tutor, I gave new idea for the ACCA and If i were them i would test it in order intentionally to confuse them to reduce their score))) anyway:)
Coming to the question, here how can I know that it is overrated value if it has not been mentioned in the question.
According to my calculation, 0.73$ is the dividen paid over its overrated value of 8.30$ and 0.66 $ is the dividend paid over its normal curren market value of 7.55 $.The question specifically asks you to calculate the market value using the dividend valuation model and using the net asset value. The actual market value is not relevant to part (a).
A dividend of $0.73 is of no relevance at all. It s the future dividends that determine the market value – not the other way round.
now I understood now I understood it says equity value which is P0 using dividend growth model.Sometimes Need to read carefully.
My Tutor you are my great how Japanese say SENSEY!
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