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Dear Sir,
I would like to ask above subject example 7,
In there, we use $20c dividend paid for year 1 and 2, but $189c market value for year 3.
My question is why we do not use $208c (20×1.04) for year 3?
If we use $189c for year 3, then can we use $1.33 ($20c/0.15) market value for year 1 and 2?Thanks.
Best Regards,
May
189c is the present value at time 2 of the dividends from time 3 onwards in perpetuity – because it is then a growing dividend, we have used the dividend valuation formula.
To use 20c/0.15 for years 1 and 2 would be ridiculous – dividing by 0.15 would only give the present value if there was a constant dividend of 20c per annum in perpetuity.
It would seem that you have not watched my lectures on this, because in the lectures I work through all of the examples and explain and expand on the lecture notes. Using the lecture notes on their own is pointless – they are only notes – and if you are not watching the lectures then you need to study from a Study Text from one of the ACCA approved publishers.
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