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Hello Tutor,past year paper June 2010 Q4 part(b)(ii) QSX CO
as the topic is closed I opened the new oneshould the answer be :
70×0.751=52.57
(70×1.03)/(0.10-0.03)x0.751=773.53which total Pv or P0 is $826.1 cents or $8.261?
please correct me if I’m wrong and I had watched the lecture, thank you.
It is wrong (and surely you have the examiners own answer, where you can see it is wrong 🙂 )
Everything you have done is correct, except for one thing.
Forgetting for the moment that the dividends are from time 4 onwards.
In the dividend valuation formula, the numerator ( Do(1+g) ) is the current dividend plus a years growth, which is the same as the dividend in 1 years time. Using the formula then gives the share price ‘now’ i.e. at time 0.In this case the dividend starts at time 4 instead of at time 1. So if we put as the numerator the dividend at time 4 (which is 70 cents), then the formula gives a MV at time 3 (instead of time 0) and we then discount this for 3 years.
So in the second line of your workings above, it should read:
(70/(0.10 – 0.03) ) x 0.751 = $7.51 (which is the answer the examiner arrived at).
Thank you for your replying, is it the question is asking the dividend growth model so we only concerned about the dividend which has growth? which is start from time 4 onward?
if the question asking dividend valuation model the time 3 dividend which is Do is included?I understand the dividend has growth is D1 which give the MV in time 3 , but didn’t understand that the dividend that is pay in 2013 is not included
It is included!!
Given that the latest year in the question is 2009 and they are discussing dividends for 2010, then 2009 must be ‘now’ i.e. time 0, and therefore 2013 is time 4.
I see I thought the time 0 is 2010, I think I’m misunderstanding the question
“The finance director expects that an annual dividend increase of 3% per year in subsequent years could be maintained.” is it mean an increase in 2013 or 2014?
I thought the subsequent year means 2014?
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