https://imgur.com/xRiC9Wt,W4M1Z6o
Can someone please walk me through these two questions step by step.
Feel quite annoyed iv spent so much time trying to understand the timing of the PV.
I seem to just enter N on the calculater wrong each time. I am also confused by the first question:
D3=E3=5(1.2)^3=8.64? why Do you need to find the future value 3 years later?
Thanks
First, draw a timeline and second (my advice) do not use the PV functions of the calculator in questions like this; instead discount the cash flows manually:
t1: (5*0,4) * 1.2 t2: (5*0.4) * 1.2^2 t3: 5*1.2^3 (as of here 100% of earnings are distributed) TV: [5*1.2^3]*1.05
t1: [(5*0,4) * 1.2] / 1.12 t2: [(5*0.4) * 1.2^2] / 1.12^2 t3: [5*1.2^3] / 1.12^3 TV: [((5*1.2^3)*1.05)/(0.12-0.05)] / 1.12^3 3: Sum up the PV of the cash flows plus the TV: $102.84 (Anwser A).
Oscar, nice explanations.
HJC: You also asked: “D3=E3=5(1.2)^3=8.64? why Do you need to find the future value 3 years later?”
D3=E3=5(1.2)^3=8.64 since all the earnings will be paid out as dividends at the end of the 3rd year.
Just like any other dividend discount model computation, here you need to find the value of all future dividend payments and then take their present value. D3=E3=5(1.2)^3 tells you the amount of dividend payment in 3 years. You would then take the present value of this future dividend payment and add to the stock price computation.
BullishBear Finance