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John Moffat.
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- October 26, 2014 at 1:03 pm #206073
Z has 10,000 shares in issue, dividends for the next five years are expected to be constant at 10 cents per share and then grow at 5% per year to perpetuity. Cost of equity is 15%.
How shall the market value be calculated…?
Secondly, dividend growth model assumes that dividend paid is until infinity. Is this correct…?
October 26, 2014 at 3:33 pm #206090Market value is the present value of future expected dividends discounted at shareholders required rate of return.
So for the first 5 years, you need to discount 10c per year using the 5 year annuity factor at 15%.
Once growth starts you use the dividend growth formula with D = 10c; g = 5%; and R = 15%.
However, because the first dividend will be at time 6 instead of as usual time 1, it means everything is 5 years late and so you need to discount the answer from the growth model formula for 5 years at 15%.The growth model assumes that shareholders expect the dividend to continue in perpetuity – i.e. to infinity. (It is their expectations that determine the market value).
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