gxg co ( june 2013)

The dividend valuation formula gives the market value 'now' (time 0) assuming that the first dividend is payable in 1 years time. When the first dividend is in 3 years time (as it is here) then because it is 2 years later than time 1, the figure from the formula is the market value 2 years later as well - i.e. at time 2. Therefore it needs discounting for 2 years to get the current market value. I do suggest that you watch my free lectures on this because I explain this point with examples (and it is common in the exam). The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.