Can't understand how this is done

rustymetal

Hello there

If someone could explain how this is done it would be great, it has been a long time since I have gone near any maths at all.

(79*(1.02))/(r – 0.02)) = 1850

where r = 6.4%


Thanks

TheBody

rustymetal wrote: »

Hello there

If someone could explain how this is done it would be great, it has been a long time since I have gone near any maths at all.

(79*(1.02))/(r – 0.02)) = 1850

where r = 6.4%


Thanks

Hi there.

Can you post up the entire question? Something seems to be incorrect in the calculation you posted.

rustymetal

The UK stock market paid dividends of around £79 billion in 2012.[1] The total stock market capitalization of the UK was around £1.85 trillion that year.[2]

What discount rate would explain this valuation if dividends were expected to grow at 2%?

If it helps I can post the growing perpetuity formula but my head will most likely explode if you try and explain that.

I also found this if it helps

Div*(1+g)/(r-g)

Apparently they use the dividend discount model and the gordon growth model.

TheBody

Ah ok. I misunderstood what you posted the first time!

We begin with [latex]\frac{(79)(1.02)}{r-0.02}=1850[/latex].

Multiplying both sides by [latex]r-0.02[/latex] we obtain

[latex]1850(r-0.02)=(79)(1.02)[/latex].

Dividing both sides by 1850 we get
[latex]r-0.02=\frac{(79)(1.02)}{1850}[/latex].

Finally, adding 0.02 to both sides we get:

[latex]r=\frac{(79)(1.02)}{1850}+0.02=0.064[/latex] or [latex]6.4\%.[/latex]

rustymetal

Thank you very much it has been sometime time since I have done any of this.

mrskinner

A = P(1 + r)¹ amount A, Principal P r rate% 1=one year

The dividends grow by 2% to 79*1.02 = 80.58

What % of the 1850 billion is this 80.58 billion?

(80.58/ 1850) * 100 = 4.355%

This rate is the discount rate minus the 2%

4.355 = r - 2

so r = 6.355% or 6.4% to one place decimal

TheBody

rustymetal wrote: »

Thank you very much it has been sometime time since I have done any of this.

No problem. Glad I could help.