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Hi sir,
Just confused about why the normal dividend growth formula wasn’t applied to this question:
A company has just paid an ordinary share dividend of 32·0 cents and is expected to pay a dividend of 33·6 cents in one year’s time. The company has a cost of equity of 13%.
What is the market price of the company’s shares to the nearest cent on an ex dividend basis?
Answer: MV = 33·6/(0·13 – 0·05) = $4·20
Why are we not using Do(1+g) and just Do in the numerator?
thanks,
YazanBy all means do, and you will get exactly the same answer!!
(Strictly the numerator should be D1 (the dividend in 1 years time), despite the way the examiner writes the formula on the formula sheet.
However usually (and certainly in this question), the dividend in 1 years time is the current dividend together with a years growth (i.e. Do (1 + g))Here is makes absolutely no difference how you show your workings.
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