Q 4a June 13 — OpenTuition Forums

Kkasia10y ago

Dear Sir, Hope you can help me with q4 from June 13 exam. I am trying to follow the same technique as you have showed us in one of your revision lectures ( I believe it was q 4 June 10) but I am not sure if I'm doing it correctly. My calculations are: 25c/0.9-0.04 = 29.06 that's the MV at yr 3 To get it to yr 0 I am discounting at 9% over 3yrs 29 x 0.772 = 22.43 Need to compare it with current PV 16c x 1.03/0.9 - 0.03 = 18.9 So the proposal will increase shareholders wealth by 3.53 per share. Could you please see if my calculations are correct? Regards

John MoffatAdmin10y ago#1

You have made a few mistakes. Firstly, 25c / (0.09 - 0.04) = 500c (not 29.06). Secondly that is the MV at time 2 (not time 3). (The formula usually gives the MV at time 0 for dividends starting at time 1. Here the dividends start at time 3, which is 2 years late, and so it gives a MV 2 years late). So the MV now is 500c discount for 2 years, which is 421c The current MV is (16c x 1.03) / (0.09 - 0.03) = 275c So the gain is 146c per share.

Kkasia10y ago#2

Thank you so much Sir. I finally get it!

John MoffatAdmin10y ago#3

Great :-)

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