Timing of dividends (dividend discount model) discount, understand, next, properly, referring

kmf229

I can't really think of any examples where you use D(-1). Remember that the payments are at the END of the year, so D1 = end of THIS year and D0 = end of LAST year.

That being said, "the dividend paid last year" and "the last dividend paid" should be the same thing (D0).

Can you give any examples where they use D(-1)?

spartan1

I understand the formula for the dividend discount model

P = D(1) / (r - g)

D(n) = dividend in n-th year
r = required return
g = growth rate of dividends

But I'm having trouble applying it properly.

Specifically, I am confused with the language they use when referring to the timing of dividends.

When they say "the next dividend is $5", I'll think D(1) = $5.

When they say "the dividend just paid is $5", I'll think D(0) = $5 (and thus D(1) = 5*(1+g)

Now this is the one that really throws me off:

When it's said that "the dividend paid last year is $5", I'll think that D(-1) is $5, and D(1), which is used in the formula, is 5*(1 + g)2

But in many examples, it seems they think of "dividend paid last year" as the dividend paid in year -1, not year 0.

Can anyone clarify?

Ionutzakis

No, I can't think of any examples that I've seen in the recent past. However, that's how I interpret "dividend paid last year" which should be D(-1), especially since they clearly interpret "dividend paid this year" as D(0). However, if they wrote the exam with "dividend paid last year" meaning the same as "dividend paid this year" = D(0), then I guess this is another one of the quirks that need to be memorised and accepted as is. But logically, the latter makes no sense.