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Sir in MFZ co J14 question while calculating total equity market value of MFZ co for 2014 using DGM they have calculated using 3.1% as g and 0% as g. The reason of using 3.1% as g I have understood i.e they have calculated using formula latest dividend and earliest dividend. But I do not understand the reason of using 0% as g. Also why they have calculated using 2 different g. Is not using 3.1% as g enough?
It is expected future growth that we should use in the formula, and we use past growth as an estimate of likely future growth.
Dividends did indeed grow at an average of 3.1% over the whole period given the question, but over the most recent year they did not grow at all – so there is an argument for expecting future growth to be zero as well.
However, I assume you have looked at the examiners marking scheme and therefore realise that just using 3.1% would have got the mark. What I have written in the previous paragraph is relevant for the discussion that was asked for in the question.
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