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Hello sir,
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: $0.5 per share and increasing by 3% per year in subsequent yearsWhat is the current share price of Cant Co using dividend valuation Model?
Can you please solve this?
Appreciate your help!
Why are you attempting questions for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers.
The MV is the PV of futures expected dividends. So discount the dividends in year 2 and in year 3,in the normal way. For year 4 onwards, when the dividend starts to increase, use the dividend valuation formula with Do = $0.50; g = 0.03; and r = 0.10.
The answer from the formula gives a value at time 3 (because the dividend stream starts at time 4 instead of time 1), so then discount the value from the formula for 3 years at 10%.
I go through a very similar example in my free lecture on the valuation of equity.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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