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In the above mentioned question, please assist in calculating part B third question.
Using the information on dividends provided in the question, and from (b) (i) and (b) (ii) above, assesses whether or not the project would add value to Lirio Co
Although I referred the answer from exam kit, it looks complicated and not able to understand how and why the calculation has been performed.
Please explain the calculation and reason for the specific calculation.
Thanks
Whether or not there is value added depends on whether the market value will increase.
The market value is the present value of future expected dividends and so we need to calculate the MV (in the normal way using the dividend valuation model) if the dividends continue to grow at the historic rate (i.e. if the project is not undertaken) and what it will be if the dividends are as expected if the project is undertaken.
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