Q4 part B calculation of dividend using DVM , https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f9/exampapers/F9_2012_jun_q.pdf
and answer https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f9/exampapers/F9_2012_jun_a.pdf
on calculating dividends using DVM , Year 3 PV of dividends after year 3 = (1,000,000 x 1·03)/(0·12 – 0·03) = $11,444,444 -----> this has been rearranged to calculate current price of share , how is it being used for dividend ?
Year 0 PV of these dividends = 11,444,444/1·123 = $8,145,929 , year 0's DF is 1 so how come year 3's DF is being taken here ?
Ask the Tutor ACCA FM
DVM , june 2012 exam question
11y ago#1The market value of a share is always the present value of future expected dividends discounted at shareholders required rate of return.
If dividends are growing at a constant rate, then the dividend growth value on the formula sheet gives the present value (i.e. the value at time 0). However simply using the formula as it stands assumes that the dividend starts growing immediately at a constant rate.
In this question (and the examiner has done the same thing several times in other questions) the dividend doesn't start growing at a constant rate until time 3. So using the formula on the time 3 dividend gives (as the answer states) the PV in three years time. Therefore we need to discount it by three years to get the PV now (and then add it to the PV of the individual dividends).
The lecture on the valuation of securities may help you.
thankyou John
11y ago#3You are welcome :-)
Sign in to reply to this topic.