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Fernwell wants to buy shares of Gurst Co in two years. Fernwell uses the dividend valuation model with an assumed dividend growth rate of 5%.
If Fernwell’s discount rate is 10% and Gurst has recently paid a dividend of $20 per share, what is the price per share that Fernwell will pay?
A.$400
B.$420
C.$441
D.$463
I can’t get the answer and the answer given by the acca team plss help meeI think it is 400?
Given that the dividend is $20, the discount rate is 10%, and the dividend growth rate is 5%:
$20 / (0.10 – 0.05) = $20 / 0.05 = $400
Oh i have assumed a zero growth
$420 presumes only one year of growth, not two. 20 * 1.05/ (0.10 -0.05)
$441 does not properly account for growth. 20 * 1.05^2/ (0.10 -0.05)
They want to buy shares of Gurst Co in two year with an assumed dividend growth rate of 5%.
So the 20 has to be grown by 5% then another 2 yearsIt is $20 * 1.05^3 / (0.10 – 0.05) = $23.1526 / 0.05 = $463
So this means by using this formula by applying 3 years growth we get 2 nd year pv is it??? Here the question asking about what is the share prize in 2 nd year so we applying growth for 3 years
Is it my assumption true sir….Sir one more doubt in case of delayed perpetuity if assume the perpetuity starting from 2 nd year the we multply the first year discount factor what is the reason why we multplying first year discount factor can you explain this logically sir…
It is as I have already explained
Fernwell wants to buy shares of Gurst Co in two years. Fernwell uses the dividend valuation model with an assumed dividend growth rate of 5%.
If Fernwell’s discount rate is 10% and Gurst has recently paid a dividend of $20 per share, what is the price per share that Fernwell will pay?They want to buy shares of Gurst Co in two year with an assumed dividend growth rate of 5%.
So the 20 has to be grown by 5% then for another 2 years
$20*1.05 is the dividend now…..we want it in 2 years so it is 20*1.05*1.05*1.05 which is 20*1.05^3It is $20 * 1.05^3 / (0.10 – 0.05) = $23.1526 / 0.05 = $463
The pv of a delayed perpetuity, if the perpetuity starts from the 2nd year, we multiply it by the first-year discount factor.
The reason for this is that the discount factor represents the present value of cash flows occurring at points in time that are one year apart.
So, when the perpetuity starts from the 2nd year, we need to discount the cash flows by one additional year to bring them to the present value. By multiplying by the first-year discount factor, we are effectively discounting the perpetuity for one extra year. This ensures that we are accounting for the time value of money and calculating the correct present value.
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