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Hello Sir
regarding the formula Po=Do(1+expected rate of growth in dividends )/RE- expected rate of growth in dividends)
In understanding the formula the upper part is clear that we calculate the dividends and its growth
but the lower part what is the idea from deducting the expected growth in dividends from the required rate of return
I mean what that will effectively influence the calculation.
keeping in mind that is a perpetuity calculation .
Thanks,
As I explain in my free lectures on this, the market value is the present value of the future expected dividends. When it is an inflating perpetuity we are effectively discounting at the real required rate of return (as discussed in the lectures on investment appraisal with inflation).
If you are good at maths that it is not difficult to derive the formula yourself, but deriving it is not examinable in Paper FM which is why you are given the formula in the exam.
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