Dividend valuation model - part 3

In this lesson

1. 0:00 Non-constant dividend growth overview
2. 1:41 Separating inconsistent and consistent periods
3. 2:53 Worked example: dividend valuation setup
4. 4:05 Excluding already-paid dividends
5. 5:20 Discounting year two dividends
6. 6:16 Delayed perpetuity calculation
7. 7:28 Combining present values

About this lesson

You'll discover how to split non-constant growth periods from constant growth periods, manually discount the irregular dividends, and then apply the perpetuity formula as a delayed calculation for the stable growth phase. This technique is essential for papers like FM, AFM, and E3, where realistic dividend forecasts rarely follow a simple pattern. The core approach involves three steps. First, identify where the dividends shift from irregular to consistent growth—the exam always tells you this point. Second, discount the irregular dividends individually using NPV, year by year. Third, use the dividend valuation formula for the constant growth period onwards, but remember it's a delayed perpetuity: the formula gives you the value at the year before the first stable dividend arrives, so you must discount that result back to present value using the correct discount factor. Working through a realistic example brings this together. You'll see how to set up a table tracking each dividend, apply the 10% cost of equity as your discount rate, and avoid common pitfalls—like accidentally including already-paid dividends or miscounting which year the perpetuity formula discounts to. The calculation is detailed and fiddly, which is precisely why examiners test it: it separates confident students from those who understand the mechanics. With practice, the method becomes reliable and the one-year timing adjustment stops catching you out.

Duration: 8m