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- This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.

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- August 5, 2021 at 4:25 pm #630503
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)

August 6, 2021 at 9:24 am #630549The 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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