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In the example of the technical article titled Business Valuations on the ACCA website, I don’t understand how the examiner calculated the 12% DCF for the 2018 perpetuity to get 7.067.
I thought we look for the perpetuity 1/0.12 and then deduct the first four years annuity from the figure.
Can you please explain?
What you have written would be correct if the 314 were to remain constant. However it id inflating at 3% per annum and therefore we need to use the growth formula from the formula sheet (usually we use apply it to dividends, but it is used for discounting any inflating perpetuity).
So the PV using the formula is 314 / (0.12 – 0.03) = 314 x 11.11111
If the perpetuity was starting at time 1, then this would give the PV now. However it starts at time 5, which is 4 years later, and therefore we need to discount for 4 years at 12% to get a PV now.
This gives 314 x 11.1111 x 0.636 = 314 x 7.067
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