The discount rate when used in share valuation models

[Alaric]

X = y + z

then z >= y more times than not?

You can construct an example for yourself on the back of a spreadsheet.

Assume 4% dividend yield, price of 100, dividends increase at 2% a year "inflation", discount rate 6%. The next dividend is thus 4.08 due in a year's time. Total discounted value of dividends over the next 10 years is 32.6. Assume the share price just grows with inflation so it's 121.9 in ten years time. This discounts back to 68.1 to bring us back to near enough 100. (It's not a coincidence that 4%+2%=6%)

[TheMotorcycleBoy]

X = y + z

then z >= y more times than not?

You can construct an example for yourself on the back of a spreadsheet.

Assume 4% dividend yield, price of 100, dividends increase at 2% a year "inflation", discount rate 6%. The next dividend is thus 4.08 due in a year's time. Total discounted value of dividends over the next 10 years is 32.6. Assume the share price just grows with inflation so it's 121.9 in ten years time. This discounts back to 68.1 to bring us back to near enough 100. (It's not a coincidence that 4%+2%=6%)

Sorry Alaric,

But I don't think that's the exact scenario. The z is not the share price. It is an estimate of the future value of the book equity, i.e. NAV, (i.e. Total assets - Total Liabilities).

That's what me and Geng were referring to earlier. There's a worked example in this book.

Perhaps I'll write a thread about it this coming weekend.

Matt