Hi Just a simple security valuation question regarding dividend cash flows that have to be discounted. If a stock paid a dividend on $1.50 last year and the expected growth rate is 8% how much is next year’s dividend? A Schweser example states that next years D1 is $1.62 (thats $1,50 x 1.08). My question is what about the dividend from the current year. If last year’s is Do and next year’s is D1 we are not factoring in this year’s, right? Last year was $1.50 with a growth rate of 8% so THIS year should be $1.62 and next year’s should be $1.75. It seems most examples state last year as Do and next year as D1, is this correct? I would think that the current year should be seen as Do and the next as D1. This would make sense if they worded it as the previous dividend instead of last year’s divided. Any thoughts??
I always thought of it as Do was already paid out and D1 is the next dividend to be paid out. Don’t necessarily think of it in years.
Yeah, some of this is just convention. I think the problem is poorly stated. A given year’s Div is paid at year end. And problems are usually set at the start of a year. So usually they’ll talk about last year’s div, which paid yesterday, and this year’s dividend, which pays in about 364 days. If the problem uses “last year’s” and “next year’s”, that usually mefans there is no intervening “this year”. I’ve never seen a question like that – one which requires you to calculate a dividend that falls between last year’s and next year’s. The only way they’ll try to trip you up on timing is extending either forward or backward by one extra period. E.g. they’ll give you last year’s div but you’ll need to calculate the next one (like your problem). Or they’ll give a trailing P/E and give you expected earnings, so you have to discount.