- November 11, 2015 at 5:14 pm #281759hjParticipant
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sir in this paper ques no 4 part b i do understand that market value is the pv of future dividends discounted at required rate of return but i dont really get what are they doing in the mark scheme
can u pls explain me in a simple way.i dont understand why have thy discounted $1000 dividends for yr 3 and then again used $1000 for dividend growth model and then discounted the market value of the Co we get from the dividend growth model to yr0.
thanks alotNovember 12, 2015 at 5:44 am #281849John MoffatKeymaster
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I assume that you have watched our free lectures, and therefore appreciate that the market value of a share is always the present value of the future dividends.
The dividend growth model formula on the formula sheet gives the present value (i.e. the market value) on the basis that the next dividend is in one years time and that there is constant growth starting immediately.
Here, the growth does not start until after 2 years and using the formula therefore gives a market value in 2 years time. To get the present value now we then need to discount for 2 years.
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