June 7 2013

I assume that you are referring to the question GXG. When we use the dividend valuation model, then the formula gives the PV now when Do is the current dividend that has just been paid. The numerator in the formula ( Do(1+g) ) is the current dividend together with one years growth which is the dividend in 1 years time. In this question we are given the dividend in 3 years time, so if we put that as the numerator (instead of Do(1+g)) then the numerator is in 3 years time instead of in 1 years time - i.e. 2 years later. So the PV we get using the formula is also 2 years late i.e. at time 2 instead of at time 0. So we then need to discount the answer for 2 years to get back to a PV now. I do explain this in my free lectures on the valuation of securities. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.

My Dear Tutor,I watched all of your lecture and because of it I can almost solve the quesions by my own but when I faced this case, i just became stuck. Thank you very much.

You are welcome :-)