- August 5, 2021 at 4:25 pm #630503NikitagarwalParticipant
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Hope you are doing great!
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 #630549John MoffatKeymaster
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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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