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Hello, dear John!
Could you please advise why in answer was used another method of g calculation?Dividend payout ratio 40%, is maintained for several years
current dividend – 50c
expected -52c
cost of equity – 12%I calculated g = 0.12*0.6 = 0.07
In the answer simply 0.52/0.50 = 0.04
Task was to calculate price of share.How identify when and what method should we use?
Thank you
Am I right that we should prioritize expectation due to according to it price for share is set.
In other cases we can use formula g=r*b.Are there any other exceptions?
The confusion is because the examiner uses the same symbol ‘r’ in the growth rate formula. ‘r’ is the return on reinvestment of retained earnings (as I explain in detail in my free lectures), which his not necessarily going to be the same as the return on equity.
If you are given details of past or future dividends (as is much more commonly the case in the exam), then always use the actual dividend growth rate rather the formula.
Again, I do explain this in my lectures (and how to calculate the average growth rate if you are given a list of several years dividends, as again is more commonly the case).
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