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Dividend V method

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Dividend V method

  • This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.
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  • December 7, 2015 at 6:27 pm #288725
    Rana
    Participant
    • Topics: 7
    • Replies: 23
    • ☆

    Dear Sir,
    my question relates to the DVM as well as the valuation of the market value of a company.
    in December 2014 exam there was a question in the MCQ’s where it was asked to calculate the market price of a company, dividend of 32c was just paid and dividend of 33.6 cents was to be paid in one year’s time. after calculating the growth the formula D1/RE-G was used. same thing goes for a question in June 2013 called GXG. the growth was only incorporated in the denominator i.e. subtracted from the cost of equity. my question is when do we incorporate the growth rate with the dividends as in d (1+g)/re-g and when do we just take the dividends given in the question?
    same goes for the share price, in question PAR also in 2014 we were asked to find the market price of convertible loans, and instead of using the growth rate in the same way given in the formula above the answer shows that we go the growth rate then multiplied current share price by growth rate to the power of 7 which is the number of years until the notes are redeemed. when given the share price is that all we have to do? can we not apply the dividend formula of d (1+g)/re-g substituting dividend with share price the same way we would in the growth formula? I mean use current share price X (1 + g) or could that only be used if we’re given the most recent share price and we’re asked to give the current market value??
    I hope I’m making sense I find all of this to be confusing myself

    December 8, 2015 at 8:08 am #288883
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    The formula has Do (1 + g) as the numerator. Do is the current dividend, and Do (1 + g) is the dividend in 1 years time (because it is the current dividend together with a years growth.

    With regard to the convertible loans, the only relevant of the growth is in calculating what they will expect to receive on redemption. The dividend valuation model is irrelevant because they deals with a growing stream of receipts whereas with debt, the interest doesn’t grow each year.
    If dividends on the share are expected to grow then they will expect the share price to grow at the same rate.
    (The reason is explained in detail in our free lectures, which are a complete course for Paper F9)

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