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Hello Sir,
Hope you are doing great!Ques-
Cant Co has a cost of equity of 10% and has forecast its future dividends as follows: 3/16
Current year: No dividend
Year 1: No dividend
Year 2: $0.25 per share
Year 3: $0.50 per share and increasing by 3% per year in subsequent years
What is the current share price of Cant Co using the dividend valuation model?I have the answer with me but I am unable to understand it from it like why are they taking year 2 dividend and multiplying with .826 (how come we arrive to this figure)
The MV is the present value of all future expected dividends. Given that one of the future dividends is $0.25 in 2 years time we need to discount it for 2 years and include the PV in the calculation of the MV.
0.826 is the 2 year discount factor at 10%.
Watch the lectures working through example 7 in Chapter 15 of our free lecture notes where I work through a similar example and explain the reasoning.
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