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Option 1
GXG co. could suspend dividends for two years, and then pay dividends of 25 cents per share from the end of the third year, increasing dividends annually by 4% per year in subsequent years. Dividends in recent years have grown by 3% per year.Recent financial information relating to GXG co is as follows:
Dividends $1,600,000
Ordinary shares (nominal value 50 cents) $5,000,000a) Using the dividend valuation model, calculate the value of GXG Co under option 1, and advise whether option 1 will be acceptable to shareholders.
Sir please help me solve this question. Thanks!
Under option 1 the dividend will be 25c per share which will be 2.5M in total
Using the formula, if we are wanting the market value now, we use Do(1+g) as the numerator. Do(1+g) is the dividend in 1 years time.
Here, he has used the formula to calculate the market value in 2 years time (because the first dividend is in 3 years time), and so the dividend 1 year later is 2.5M (not 2.5M x (1+g))
He has then discounted by 2 years to get back to a market value now.
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