Looking at the solution to the valuation of the company, the solution states: "...assuming that i-g is 5%... Then on this basis, the value at 1/1/11 would be: 26/(0.8x0.05) The value at 1/1/11 might be estimated by assuming two years of dividend growth at, say, 5%. This would give ... £717m." I assume from this that dividends are paid annually at 31/12/xx. I can therefore see that the value at 1/1/11 of the discounted dividends will be "Value of dividend for 2011"/(i-g) i.e. 26x1.05^2/(i-g) My question: Where does the 0.8 come from? Does anyone have any idea? This is the part that has stumped me (I can get £717 by doing 26x1.05^2/(0.8x0.05)) Any help is appreciated!
You're right. The 0.8 is not required. Well spotted. We'll change the solution for next year and add it to the Corrections document. Thanks for pointing this out. Duncan
