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Hi John,
This question requires you to value both Burcolene and PetroFrancais using the FCFF perpetuity method. However why do we not need to discount the answer to PV using the previous years discount rate as we do in say the Kodiak Company question (Dec 09)?
thanks,
Using the dividend valuation model to get the present value of an inflating perpetuity assumes that the inflation starts immediately.
If it starts late (as in Kodiak) then the result from the formula is ‘late’ by the same number of years and so needs discounting to get a PV now.
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