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Can't understand how this is done

  • 01-11-2014 11:31PM
    #1
    rustymetal
    Registered Users, Registered Users 2 Posts: 29 ✭


    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


Comments

  • #2
    TheBody
    Registered Users, Registered Users 2 Posts: 5,657 ✭✭✭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.


  • #3
    rustymetal
    Registered Users, Registered Users 2 Posts: 29 ✭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.


  • #4
    TheBody
    Registered Users, Registered Users 2 Posts: 5,657 ✭✭✭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]


  • #5
    rustymetal
    Registered Users, Registered Users 2 Posts: 29 ✭rustymetal


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


  • #6
    mrskinner
    Registered Users, Registered Users 2 Posts: 412 ✭✭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


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  • #7
    TheBody
    Registered Users, Registered Users 2 Posts: 5,657 ✭✭✭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.


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