Hi there, I refer to the below statement: "g is the expected capital gain, ie the expected annual growth in dividends" The second part is not intuitive to me. Wouldn't the "expected annual growth in dividends" contribute to dividend income and not capital gain? Thanks Kris
Hi I know what you mean - it's not intuitive to me either. If you take a look at Section 3.5 in Chapter 23 I think that will help. If we view the price of a share as being the sum of all discounted future cashflows, then if those future cashflows change we would expect the price to change as well. By making a few assumptions (as explained in Section 3.5) we can algebraically interpret the dividend growth rate as being the same as the expected capital growth. Hope that helps
