Question

Two analysts are calculating the value of the same stock. They projections for the stock's future......

Two analysts are calculating the value of the same stock. They projections for the stock's future... Two analysts are calculating the value of the same stock. They projections for the stock's future dividends are the same. They also use the same discount rate. However, one analyst discounts future dividends to calculate the price, whereas the other analyst discounts next periods dividends and price (again based on future dividends) to calculate the price. The prices calculated by the two analysts will be:

different only if the dividends are increasing with time.

different only if the dividends are decreasing with time.

different or the same, there is not enough information to decide.

the same.

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Answer #1

Answer - Same

This question is an application of dividend discount model concept, according to which value of share is present value of dividends expected from next year onwards. By mathematical representation:

This approach is used by the analyst 1.

Similar to V0, you can also have mathematical representations for V1, V2.. Vn

Now, looking at these 3 mathematical relations, we can say:

or

which is dividend next year + value next year discounted to today. But remember value next year is discounted value of dividends expected from next to next year onwards... This approach is used by 2nd analyst.

Ultimately, both would yield the same result.

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