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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 confusedAlso 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 clarifyThe 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.
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