I know a lot of students get stuck on equity. Let’s have this post all about Equities. Any questions feel free to ask
Thank you - I will certainly circle back here when I reach equity!
Hi,
I came across this one:
Titan Industries is not expected to pay a dividend until ten years from now at which time it is expected to pay a dividend of $1.25 and increase the dividend at a rate of 4% thereafter. If the required rate of return is 12%, the current value of Titan is closest to:
A. $5.64
B. $12.78.
C. $15.63.
The way they answered is V9=DPS10/(r-g) and then discounting this value over 9 periods. However, I disagree because there is no growth until the end of 10th period, therefore I dont think its correct to use the DDM here in finding the V9. i would rather find the Terminal value at the end of the 10th period and then discount it over the 10 periods/
Any thoughts on this?
5.64
Put 100 years of cash flows into Excel, discount them back to today and see what you get.
The formula CFAI gives you for this situation is for an immediate annuity, so the V will be as of time 9. You can calculate the value as of time 10 by treating the divs as an annuity due as well.
You can also shoehorn the calc into the TVM worksheet on the BA Ii! 