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Dividend valuation model

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Dividend valuation model

  • 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
    Nikitagarwal
    Participant
    • Topics: 153
    • Replies: 146
    • ☆☆☆

    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 #630549
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    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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