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February 9, 2020 at 12:04 pm
Hi John, regarding example 5, it says the cash flows have been forecast at $5000 p.a, and inflating at 4% p.a., does it means in year 1, we will get cash flow 5000*(1.04) straight away?
Would it be possible to have $5000 in year 1 and then inflating at 4% (if it is the case, how would the wording be)?
Thanks heaps in advance!
John Moffat says
February 9, 2020 at 3:49 pm
Yes – in example 5 the cash flow will be 5.000 x 1.04 in 1 years time.
And yes it is possible to have an actual 5,000 at time 1 and for it then to inflate at 4% per year. It would be worded as you have done (or in the same sort of way as example 6 is worded).
February 10, 2020 at 2:24 pm
Thank you 🙂
February 10, 2020 at 2:51 pm
You are welcome 🙂
September 27, 2019 at 11:38 am
can i use the method you used in f9 for this kind of questions? actual interest = real interest * inflation rate.
September 27, 2019 at 11:39 am
and discount with real interest rate?
September 27, 2019 at 3:06 pm
Yes you can, because the formula I use in this example is derived from the formula for getting the real rate (if you are good at algebra then you can arrive at it yourself).
However, it is a bit quicker to use the dividend valuation formula because it is given on the formula sheet 🙂
July 13, 2019 at 6:46 pm
Hello sir, what if the inflation rate is higher than the discount rate and is this possible in any case? As the discount rate includes the impact of inflation, is it practically possible that the inflation rate be higher than the discount rate?
July 14, 2019 at 11:03 am
Theoretically it would be possible, but in practice and (more importantly, in the exam) it will not be higher.
July 16, 2019 at 1:06 pm
July 16, 2019 at 2:48 pm
May 9, 2019 at 6:38 am
In example 6, why do we use the growth model formula starting in year 4 when the first flow is in year 3 (7,000) and inflating at a rate of 5% thereafter. So this way the formula would discount the perpetuity back to year 2 i/o year 3 as you explained in your workings.
Thank you for your reply in advance!
May 9, 2019 at 3:09 pm
You should remember from Paper PM (was F9) that when dealing with an inflating perpetuity (which in Paper FM was usually inflating dividends) that if the inflating stream started at time 1, then in the formula we put as Do the current dividend that has just been paid (i.e. at time 0).
Here, instead of the inflating stream starting at time 1, I have taken it as starting at time 4 (and discounting the time 3 flow separately). Therefore for Do in the formula we use the time 3 flow of 7,000.
By all means use the formula for the stream starting at time 3 instead, and discount the answer for 2 years, but then you need to use D0(1+g) as being 7,000 (and not 7,000 x (1+g)). You will get the same answer:
(7,000 / (0.20 – 0.05) ) x ((1/1.20)^2) = 32,407.
This is the same as the PV of 7,000 in 3 years time, plus the PV of the inflating stream from time 4 onwards as in the lecture. 4,053 + 28,371 = 32,423
(The difference is simply due to the rounding of the discount factors and is, as always, irrelevant in the exam)
March 20, 2019 at 8:05 pm
excellent lecture. although obvious, and too time consuming could we find the yr1 to 3 perpetuity using the growth model and deduct it from the 1 to infinity?
March 21, 2019 at 7:49 am
loukasierides: Yes (but as you say it would be time consuming 🙂 )
March 21, 2019 at 11:17 am
thank you very much
January 18, 2019 at 5:18 pm
January 19, 2019 at 10:58 am
Thank you for your comment 🙂
December 30, 2018 at 1:27 pm
Hi, sir. As for example 6, why PV of $49,000 is not discounted using year 4 rate 0.482? (20%@4 year)
August 12, 2018 at 1:34 pm
Hi Sir. For example 6, I used PV of year 3 ($4053) to infinity, i get the same answer of $28371. Is this method correct?
August 12, 2018 at 1:56 pm
Yes – that is fine 🙂
August 18, 2018 at 6:02 am
Thank you Sir!
August 18, 2018 at 10:04 am
August 2, 2018 at 2:23 am
Sir why do we take the pv of 1 to infinity as the pv of 4 to infinity?
August 2, 2018 at 7:48 am
The dividend valuation formula give the PV for any inflating perpetuity. If the first flow is in 1 years time then it gives a PV at time 0. If the first flow is in 4 years time then it gives a PV at time 3.
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