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hello Sir,
plz explain me when shoild i use the formula Po=D1 / Ke-g
is it when div is about to be paid this was used in QSX june 2010 pb (ii)
but when i see the corhig (6/12) the dividend the usual formula
Po=Do(1+g)/Ke-g has been used
what is the difference in the two scenarios which i am not being able to pick
i am ok with the discounting in both scenariosThe formula gives the ex-div market value (Po).
D1 and Do(1+g) are the same thing – D1 is the dividend in 1 years time, which is the same as the current dividend plus growth (i.e. D0(1+g))
i am still confused 🙁
Sir plz explain me with reference to those two questions i mentioned earlierMy answer to your original question remains the same. D1 in the dividend in 1 years time, and Do(1+g) is exactly the same thing. The reason D1 is higher than Do is precisely because of the growth. It is the same formula – there is only the one formula and you can write it either way.
What I guess is confusing you is a different problem. The formula gives the market value now (Po) assuming that the current dividend is growing at a constant rate. That Po is now and that D1 (or Do(1+g) is in 1 years time.
In QSX, the dividend does not start growing at a content rate until 4 years from now. So the formula can only be using from then on. So……if instead of D1 we have D4, the formula will give P3 instead of P0 (3 years later in both cases).As you will know from my lectures, the market value is the present value of future dividends, so having got P3 we then discount for 3 years to get Po (which is what we want).
so in QSX the dividend of 70c is inclusive of growth rate cz its in the fourth year and directors assume the growth rate 0f 3% after 3 years
whereas in corhig year 3 div is given as 1000 so we need to add growth rate to get the value after year 3.
am i correct?
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