Hi David, I am currently at Cass Business School in London, and one of the modules ‘Principles of Finance’ covers this topic. I am struggling with one issue when calculating the Stock Value. In your example, The firm will pay a dividend of $2 one year from today. The Dividend is expected to grow at 12% for the first 3 years. Why then in the first year do you not multiply 2(1.12) / 1.11 and instead have 2/1.11? So, I am effectively unsure, when the ‘growth of 12%’ starts.
Your videos have been a life saver by the way.
Best, Stephen
Hi Stephen, interesting point. Actually, it depends on how the story is told on your exam or by your professor. You’re correct in the sense that if the dividend given at the end of *this* year already reflects the growth, then you would already use 2(1.12)/1.11 instead of 1/1.11. On the other hand, if the growth is applied at the end of next year, then you would use my formula. It boils down to how the story is told and/or the *assumptions* of your professor.
4 Comments
Ali
17 December 2011where i can get the full list of premium videos?
David
19 December 2011Hello Ali, just go the tutorial page and then look at the “All You Can Eat” videos in the thing that looks like a buffet menu. Cheers!
Stephen
18 July 2013Hi David, I am currently at Cass Business School in London, and one of the modules ‘Principles of Finance’ covers this topic. I am struggling with one issue when calculating the Stock Value. In your example, The firm will pay a dividend of $2 one year from today. The Dividend is expected to grow at 12% for the first 3 years. Why then in the first year do you not multiply 2(1.12) / 1.11 and instead have 2/1.11? So, I am effectively unsure, when the ‘growth of 12%’ starts.
Your videos have been a life saver by the way.
Best, Stephen
David
23 July 2013Hi Stephen, interesting point. Actually, it depends on how the story is told on your exam or by your professor. You’re correct in the sense that if the dividend given at the end of *this* year already reflects the growth, then you would already use 2(1.12)/1.11 instead of 1/1.11. On the other hand, if the growth is applied at the end of next year, then you would use my formula. It boils down to how the story is told and/or the *assumptions* of your professor.
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