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Dividend discount model- urgent help
I noticed that in some problems growth(g) is added to current dividend (Do) in calculation of market price(Po). i.e. Po=Do(1+g)/Ke-g. While in others growth(g) is not added to the current dividend (Do). i.e. Po=Do/Ke-g. Can anyone explain, when should we not add growth to current dividend in calculating MPS?
Example: shares of voyage Limited are being quoted at a price earning ratio of 8 times the company returns 45% of its earnings which are rs 5 per share. You are required to compute the cost of equity to the company if the market expects a growth rate of 15%p.a.
solution:
cost of equity capital =( Dividend *100/ price )+ growth
=(2.75*100/40) + 15%
=21.8 7%
Why isn't growth rate of 15% added to dividend of rupees 2.75 to arrive at expected dividend and used in the formula to calculate market price?
Replies (2)
Growth rate is to be applied when the data for the dividend given is for past years i.e when Do is given
to make it D1 we multiply by (1+ growth rate)
in your case dividend data given is D1 so growth rate is not multiplied
Isn't Rs. 2.75 current dividend, that implies Do? D1 is expected divedend for next year right?
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