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Hi sir,
I have trouble understanding at year 0 ,50/(1+4%)2=42.1 m. I think we should use 9% rather than 4% here because we are required to use div valuation model and div growth rate is 4% after year 3. By comparing with June 2012 Q4 , I am totally confused about div val model.I expect you can explain the differences between the two questions in detail to me. Thanks in advance:)The dividend valuation formula is Po = (Do(1+g))/(Re – g).
This gives the MV now (i.e. the PV now, since the MV is the PV of future dividends discounted at the shareholder required rate of return, Re).
However, this assumes that the first dividend is in one years time.
Also (Do (1+g)) is the dividend in 1 years time (the current dividend plus growth).In this question, content growth only starts in 3 years time (which is two years later than in 1 years time) and therefore the answer from the formula is the PV in 2 years time (two years later than the PV now). So the answer needs discounting by 2 years at the shareholder required rate of return.
That is what the examiners answer has done – dividing by (1.09)^2 is discounting for 2 years at 9% (although more sensible would have just used the discount factor from the tables, which obviously gives the same answer).Thanks, I just found that the solution is right, but I wrote down a wrong number:(
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