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Hello Tutor,
1)For June 2012 Question 4,Corhig Co part(b) why the PV of the future dividend is divided by year 3 present factor (12%)(that after year 3)(1000 x 1.03) not year 4 present factor?
is it because the future dividend is the present value of year 3 which is not incurred in year 4?2)December 2011 Q4, BAR CO, why the $10 million is deducted from the revised book value of equity of $90 million? is it because its only redeemed $80 million of bond value ,another 10million is premium of redeemed price which is debit to expense account?
3) Why the calculation of debt /equity ratio (debt to equity ratio) ,some of the calculation or answer wil include the reserves value some will be excluded? is it because some calculate the market value and some are based on book value?
Thank you so much!
In future, please start new threads when you are asking about different questions. The reason is that we do not give private tuition and our answers are for the benefit of everyone – many people use the search facility to find previous answers to whatever problems they have 🙂
1. The dividend valuation formula give the present value now (time 0) when the first dividend is in 1 years time. If the first dividend is in 4 years time (which is 3 years later) then it gives a PV 3 years later – at time 3 instead of time 0. Therefore the answer needs discounting for 3 years to get a PV ‘now’. (And we multiply by the discount factor – we don’t divide by it).
I explain this – with examples – in my free lectures!!2. Correct (and the examiners answer does actually say this!)
3. Yes. The book value of equity is share capital plus reserves. The market value of equity effectively includes the reserves.
Again, I explain this in my lectures.Please watch the lectures – you cannot expect me to type out my lectures again here!!
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