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June 2012 question 4 a
Why did the examiner just use the year 1 earning? Why not 2 or 3?Can you explain me the third paragraph of part a the earnings figure used in the valuation…….
Why are we supposed to calculate price earnings value using average earnings? Can’t find it in the question though.(B)
Ke = 12%Pv at year 2 = 500,000/(0.12-0.03)
=5,555,556
In year 0 terms = 5,555,556* 0.797(DF @ 9% year 2 )= 442,778Pv (3rd year) = 1,000,000(1+0.03)/0.12-0.03
=11,444,444
I am not able to get the last answerI have done this steps like how you have explained in your revision lecture June 2013 question 4 (a)
Would be glad if you could explain me this like in your lecture
Thanks in advance.You first question:
We apply the PE ratio to current earnings – not to future earnings.
His third paragraph is not needed (and is not strictly correct anyway).
The market value is the PV of future dividends, and the dividends at time 2 and 3 need to be discounted separately.
From time 4 onwards there is constant growth and so we can use the dividend valuation formula, however because the dividends are from time 4 onwards instead of (as usual) time 1 onwards, and therefore start 3 years late, then we need to discount the answer from the formula by 3 more years.Please don’t keep simply heading up your threads with the word ‘doubt’. Give the name of the question or the topic – our answers are here to give help to everyone, and just the word ‘doubt’ does not let others know what the question is about 🙂
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