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Using the dividend valuation model to determine the value of Okazu Co. I don’t understand how the examiner got 7.5% to calculate the value of the company taken into consideration the 60% fall in dividend from year 4.
Thanks.
It is not the dividend that falls by 60% – the question says that the growth rate in dividends will fall by 60%.
The current growth rate is 18.7% and so the rate of growth will fall to 40% x 18.7%.
can we say g=75% retention rate * 12% cost of equity ( which is the return on equity) ?
No, because clearly from the results of part (a) of the question, this is not the growth rate for the first four years.
why have we used 8% to find annuity for the equal repayments?
8% is not the cost of debt nor the yield to maturity..its the coupon right since they said ‘8%bond’…?8% is indeed neither the cost of debt nor the yield to maturity. However that is irrelevant.
The question says that the interest on the bond is 8% and the repayments will be of equal amounts each year.
The PV of repayments (however they are made) discounted at the rate of interest on the borrowing, will always be equal to the amount of the borrowing. The whole point of discounting is accounting for the interest being charged.Try is yourself – however the repayments are being made, you will find that the PV of the repayments discounted at the rate of interest on the borrowing will always equal the amount of the borrowing.
Thank you. So to summarize, we used the 8% here because we did not know the amount of the repayment. So the PV of repayments at coupon is equal to the loan, as a rule of thumb.
But in other normal cases, we use the kd or IRR to discount.
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