june 2013 q4 — OpenTuition Forums

JJohann10y ago

Good morning professor, Was going through June 13 past paper and got stuck on quest 4 part a. Using dividend valuation shouldn't the price per share be calculated as p=do(1+g)/ke-g the examiner used this formula however didn't account for the growth in dividends and just used the 25c per share expected to be paid at the end of year 3. Also dividends are paid at the end of year 3 shouldn't the dividends be discounted by 3 years to get their pv at yr0? Appreciate if you can explain the logic behind this calculation Thx in advance

John MoffatTutor10y ago#1

I will have to explain the two problems separately. Firstly, suppose the question had said that the 25c was payable in 1 years time (and was then growing). Usually we are told what Do is, and so the dividend in 1 years time is Do(1+g) (which is on the top of the formula). However here we know that the dividend in 1 year will be 25c, and so Do(1+g) = 25c Secondly, if the 25c had been in 1 years time, then the formula would give the market value 'now' (time 0). However here, the 25c is in 3 years time, which is 2 years later. So the formula gives the market value 2 years later - time 2 instead of time 0 - and so we need to discount it for 2 years in order to get the market value 'now'.

JJohann10y ago#2

Dear professor Thanks for your reply i fully understood part 2 but still am bit shaky on the first part. So if i understood correctly if this years dividends are given we need to account for the growth to derive next years dividends however if we are given what the actual dividends will be at a future date we account for these as d1and therefore no need to account fir growth. Correct?

John MoffatTutor10y ago#3

That is correct :-)

JJohann10y ago#4

Thanks alot

John MoffatTutor10y ago#5

You are welcome :-)

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