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What exactly is the difference between dividend valuation model and dividend growth model? In the BPP text for valuation, it says that the former is for constant dividends and the latter for growth in dividends.
And, what is the meaning of constant growth in dividends?
Also, when we use the present value of future cash flows, when there is a constant growth of dividend at say a particular % till infinity , ie perpetuity,
We do Annual cash flow × (1÷ cost of equity – growth rate) x discount factor of the previous year. Why do we use the previous year’s discount rate?
1. There is no difference. If BPP say differently then they are wrong 🙂
2. Constant growth in dividends means that the rate of growth is expected to be the same each year.
3. We only multiply by the discount factor for the previous year if the growth is starting a year later.
All of the above is explained in detail in my free lectures. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
If you are watching the lectures then you do not need a Study Text. The book that is essential is the Revision Kit, because that contains lots of exam standard questions for practice, and practice is vital to passing the exam.