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Sir I have a doubt in one of the questions in the BPP study text. Its confusing and I’m not able to understand. The question is:
Target paid a dividend of $250,000 this year. The current return to shareholders of companies in the same industry as Target is 12%, although it is expected that an additional risk premium of 2% will be applicable to Target, being a smaller and unquoted company. Compute the expected valuation of Target if:
a) The dividend is expected to grow at a 3% rate for 3 years and 2% afterwards.Could you help me with understanding how to do it.
The market value is the PV of the future expected dividends discounted at the investors required rate of return.
For the next three years, you can calculate the expected dividends and then discount each of them individually. For the years after (a perpetuity growing at 2%) you have to use the dividend valuation formula from the formula sheet, but because the perpetuity starts 3 years late (at time 4 instead of time 1) you need to discount the answer for 3 years to get the PV.
I explain this exercise, with examples, in my free lectures on the valuation of equity.
The lectures are a complete free course, and if you are watching the lectures then you do not really need the Study Text. What is far, far more important is that you have a Revision Kit and that you work through all of the questions, because they are all either past exam questions or are exam-standard questions.
For the first 3 years i got the present value of future expected dividend ,that is (258*0.877) + (266*0.769) + (274*0.675) = 616. But I’m unable to understand and proceed after that. Could you show the calculations for time 4 and the perpetuity thing.
I watched your lectures but did not understand this sum
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