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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 pvWhat 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
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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