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Div growth confusing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Div growth confusing

  • This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.
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  • May 13, 2016 at 9:48 am #314907
    Noura Dahmash
    Member
    • Topics: 31
    • Replies: 36
    • ☆☆

    Hi John ,
    I just want to ask on calculating the P0 of dividends supposed that the growth is for the forseeable future coz every time i see an example i find it calculated differently which confusing me .
    Let us take the example in Bpp text page 322
    They say that D0 is 20c , ke is 15%, they required the value of one share suppose a constant div for for years and growth of 7% pa in perpetuity.

    I know that there is
    1- the pv of 20c div annuity discounted at 15% , gives 0.57
    2-then from year 5 on i need to apply first The formula which gives P0=2.68
    Then i will discount this value in perpetuity (1/15) then discounted it back to y0 using Df y5 @15%
    3- add 1+2 to have the pv

    What i dont understand is why in the book they discounted the P0 in step 2 (2.68 ) for 4 Years df is 0.572,instead of what i learnt in step 2.

    Please i need to know which one is correct

    Thank you

    May 13, 2016 at 4:23 pm #314954
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    I do not have the BPP Study Text, but I think I know what you are asking.

    What you should be doing is this:

    1. Calculate the PV of 20c per annum by multiplying by the 4 year annuity factor at 15%, which does indeed give $0.57
    2. Use the dividend growth formula from the formula sheet for the perpetuity.
    (20 x 1.07) / (0.15 – 0.07) = $2.675
    3. Had the first dividend been in 1 years time, this would give a value at time 0. However the first dividend is in 5 years time, which is 4 years later. So it gives a value 4 years later – i.e. at time 4. So you then need to discount it by 4 years using the normal discount factor at 15%.

    Then add 1 and 3.

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