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Dea John,
This is totally off my mind, what is done in part b of question.I have calculated equity right, and I’m skilled at growth model. But I cant understand they the answer is given. Why they have used npv method and then growth model.
Please explain me the question.
Many Thanks
You will know from my lectures that the market value of a share is the present value of future dividends.
The growth model formula calculates the present value assuming there is constant growth and assuming that the next dividend is in 1 years time.
In this question, there is not constant growth for the first three years and so these dividends have to be discounted separately – there is no alternative.
Once there is content growth we can use the formula, but because the growth starts 3 years later the formula gives a PV in three years time. So we need to discount the answer for 3 years to get a PV now.
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