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Dear Sir,
Although i forgot which chapter it was, you did mention that for the formula:
Do(1+g)
Po = ———–
Ke – gPo is the M.V for now and Do(1+g) is the Dividend in one years time.
By going we the same principle, if we need to find the M.V after 2 years, we need to use this formula, but with (1+g) with the power 2.In chapter 17 example 6 part (c), you mentioned that the M.V after 2 years = dividend X (1+g)^2
Why did we not use the formula this formula?
Dividend X (1+g)^2
Po = ————————–
Ke – gHere will the answer not be that of the M.V after 2 years?
Why did you only use Dividend X (1+g)^2 and not the formula above?
I am really confused with that.
Carpe Diem
NischayeBy all means use the formula, and you will get exactly the same answer.
However there is one mistake in what you have written.
Normally when using the formula, we get an ex div MV ‘now’ i.e. assuming that they have just paid a dividend and that the first dividend is in 1 years time (which is why we have Do(1+g) as the numerator – it is the dividend in 1 years time).
If we want a MV in 2 years time, then using the formula we would assume again that the first dividend would be 1 year later – i.e. at time 3. So the numerator would become
Do (1+g)^3. (Or, if I am still confusing you, then instead of Do in the formula, we would use the dividend in 2 years time (Do x (1+g)^2) in the formula, which would again end up with Do x (1+g)^3 as the numerator.)Try it and you will see that you get exactly the same answer (but it does take longer and there is more chance of making a silly calculator mistake 🙂 )
(Also, I did not use “dividend x (1+g)^2” ! I used the fact that the MV in 2 years time will be the MV now x (1+g)^2 )
Have you not watched the free lectures on this, because I do explain in the lecture that automatically the MV has to grow at the same rate as the growth in dividends.
I actually made a mistake while writing the question.
I meant (1+g)^3. I did understand the concept that at market value in 2 years time will give a numerator of Do (1+g)^3 in the formula. I guess i was in a hurry while writing the question.
I was too quick to question you. I only had to try the formula to find out that indeed i would get the same answer.
I feel more at ease while using the formula, i guess i will stick with it.
Thanks a lot for your time and help 🙂
Carpe Diem
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