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Hi John,
I have a question from BPP text book pg 348 – business valuations using DGM.Target paid a dividend of 250k this year. The current return to shareholders of companies in the same industry as Target is 12%, although it is expected that an additional risk premium of 2% will be applicable to Target, being a smaller and unquoted company. Compute the expected valuation of Target, if:
A) The current level of dividend is expected to continue into the foreseeable future;
B) the dividend is expected to grow at a rate of 4% pa into the foreseeable future;
C) the dividend is expected to grow at 3% rate for 3 years, and 2% afterwards.I was ok for A and B, but in C the answer discounts the Y4 dividend at annuity using the discount factor of 14% at year 3. Why don’t we use the df for Y4?
Thanks in advance 🙂
Annuity factors give the PV ‘now’ – time 0 – when the first flow is in 1 years time.
If the first flow is in 4 years time, then it is starting 3 years late (time 4 instead of time 1) and therefore the PV is 3 years later (time 3 instead of time 0) and so needs discounting for 3 years.
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