Sir plz correct me if i am wrong,
we are discounting for 2 years becoz by default using the formula gives a P.V. now when the first constant growth dividend is in 1 years time and as in example 7 when the first constant growth dividend is in 3rd years time ( which is after 2 years ) then using the formula on example 7 gives the P.V. in 2 years time. I am confused
Also my second query,
Dividend will remain at 20c for each of the next 2 years meaning for 2 full years and thereafter will grow at 4% (meaning after 2 years) then why are we discounting the 2nd year in perpetuity ? Shouldn't it start from 3rd year (3- infinity) ? I have done all previous examples and lectures but i think im missing some point here. Is it similar to perpetuity cash flow starting at later date. Its getting kind of confusing. Plz clarify
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chapter 15 example 7
3y ago#1The formula does indeed give the PV at time 2 of the dividends from time 3 onwards, and so the answer needs discounting for 2 years. In addition there are the dividends at time 1 and tim2, and they need discounting individually.
Had the growing dividends started at time 1, then the numerator in for formula would be the current dividend (i.e. the time 0 dividends) multiplied by 1+g.
Here the first growing dividend is at time 3 (2 years later than time 1) and so in the numerator we use the dividend at time 2 (2 years later than time 0) multiplied by 1+g.
Thank you soo much sir for clearing that up
3y ago#3You are welcome :-)
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