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Hello there… could you please help me to get the logic behind this question
Cant co has a cost of equity of 10% and has forecast it’s future dividend as follows
Current year :no dividend
Year 1 :no dividend
Year 2:0.25 per share
Year 3: 0.50 per share and increasing by 3% per year in subsequent years
The answer is 6.11per share please help me out with thisThe MV of a share is the PV of the future expected dividends discounted at the shareholders required rate of return.
You need to discount the 0.25 at time 2 for 2 years at 10%, and then add on the PV of the growing dividends (using the dividend valuation formula but then discounting for 2 more years because the dividends start at time 3 instead of at time 1 – i.e 2 years later).
I work through a very similar example in my lectures on the valuation of securities.
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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