- April 15, 2022 at 6:39 am #653326
Sir if the question asked the market price in 2 years time. if used the growth rate of dividends as rate of growth of market price. but if we are discounting via cost of capital gives us present value( market price @ time 0. if we unwind the discounting using the same rate should it also not give the market value @ year 2 ? if suppose share holders want 12% will not the fix the price in that rate also in time 2?April 15, 2022 at 8:52 am #653344
The MV in 2 years time will be the present value of the dividends from time 3 onwards discounted to time 2 at 12%.
The current MV is the PV of the dividends from time 1 onwards discounted to time 0. The dividend stream from time 3 onwards will be exactly the same as the dividend stream from time 1 onwards except that they will all be higher by 2 years growth. Therefore the PV of the dividends from time 3 onwards when discounted to time 2 will automatically be higher than the current MV by 2 years growth.
I explain this when working through example 6 part (c) in my free lectures working through Chapter 17 of our free lecture notes.April 16, 2022 at 5:16 am #653414
But sure you used the dividend growth rate rather than cost of capital in your example. To calculate MV in two years time.
if cost of capital is 10% 6% & dividend is 10c per annum is growth rate then present value =265c
shouldn’t the market value in two years time be 265=x(1+0.1)^2? but as I am doing this I realise I have not integrated the growth factor. How do I do it sir?April 16, 2022 at 6:17 am #653415
sir what if there was no growth?April 16, 2022 at 8:08 am #653422
The market value in 2 years time is the current market value x (1+g)^2 where g is the annual rate of growth (just as I explain in my lecture and as I wrote in my previous reply).
If there is no growth then the market value in 2 years time will be the same as the current market value, both from using the formula above but also from using logic because if the expected future dividends have not changed then there is no reason for the market value to change.April 16, 2022 at 9:30 am #653424
Got is sir. Thank you so much. sir can I say this is the current market price if people have full knowledge of the market. Cause from my experience the current market price is never the current market price from valuation. Although I would say I would buy if the (sticker price) is lower than that of the market price from my valuation.April 16, 2022 at 2:24 pm #653434
The market price is based on the dividends that shareholders as a whole are expecting in the future. If you think that the company will do better than shareholders as a whole are expecting, then you would be prepared to buy the share at the current market value, because if you are correct and the company does do better than expected the market value in the future will increase.
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