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Hello Sir,
Can you explain me part a of June 2012 Question 4.
Secondly, will you upload more answers from the past question papers?
With regard to part (a), the PE ratio is the current earnings per share divided by the market value.
So using the PE of a similar company and multiplying it by the current earnings of our company will give a market value for our company.
With regard to part (b), the market value of shares is the present value of future dividends discounted at the shareholders required rate of return. For the first two years we need to discount the dividends individually, but once the constant growth starts we can use the formula from the formula sheet.
(The free lectures on share valuations will help you with both parts)
I will upload more answers as and when I have the time available.
After adjusting the cost of capital using capm (12%) am very much confused where kaplan got 500/1.122 for yr 1 and 1000/1.123 for yr 2. Pls hlp sir.
I don’t have the Kaplan book but I do have the original question and answer.
Either they have mistyped, or you have misread.
The PV of the year 2 dividend should read 500 / (1.12^2) (which is 2 years discounting at 12%)
The PV of the year 3 dividend should read 1,000 / (1.12^3) (which is 3 years discounting at 12%)You will know from our free lectures that the market value is the present value of future dividends. You can use the dividend valuation formula for the dividends after time 3 (because there is then constant growth) but you have to discount the dividends at times 2 and 3 separately (there is no dividend at time 1).
For the time 2 and time 3 discounting, you could of course have used the tables instead of first principles.
Hi John,
I’ve worked this question and found the cost of equity of 12%. Then tried to discount the future dividends at the disc factor of 12%, but my values don’t agree with the answer.
I am taking dividends of time 2 = 500 x df 12% x 2 years 0.797 = 398.5 million
dividends of time 3 = 1000 x df 12% x 3 years 0.712 = 712 milliontotal present value of future dividends = 398.5+712 = 1110.5 million
Why does the answer continue by taking the market value at year 3 (discounted) and adds it to the total of the present values of the future dividends?
Thank you for your help 🙂
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