[jenny]

Ah ok 🙂
So, just to be clear, answers 2,3, and 4 are weaknesses?

[jenny]

9.3 is correct, you need to discount Y4 10.4 0.751 7.8

see John’s answer:
“The dividend valuation formula gives the present value of the dividends when the first dividend is in 1 years time. Here, the first dividend is in 4 years time, which is 3 years later. So the answer of 10.4 is the PV in 3 years time. Therefore we need to discount the 10.4 for 3 years at 10%, which is 10.4 x 1/1.1^3 (although again it would be more sensible to use the tables provided!!!) = 7.80”

Therefore the total MV = 0.55 + 0.50 + 0.45 + 7.80 = $9.30

[jenny]

Ah, thank you so much!!! Really appreciate your quick reply!
I have watched all your lectures already, but will re-watch this one.
Thanks for all your help 🙂

[jenny]

Sorry to be a pain, John – the timings really confuse me 🙁

So, basically the question is “what is the mv of all expected dividends for the next 4 years?” / “how much are theses future dividends worth ‘now’ “? Correct?

First dividend will be in Y1 = 0.6×1/1.10 = 0.55
Second in Y2: 0.60 x 1/1.10^2 = 0.50
Third in Y3: 0.60 x 1/1.10^3 = 0.45
And then the forth incl. growth of 4% = 0.60 x 1/1.10^4 = 0.41 x 1.04 / (0.10 – 0.04) = 7.10

That’s how I understand it. or alternatively:

First dividend will be paid in Y0 = 0.60
Second in Y2: 0.6×1/1.10 = 0.55
Third in Y3: 0.60 x 1/1.10^2 = 0.50
And then the forth incl. growth of 4% = 0.60 x 1/10^3 = 0.45 x 1.04 / (0.10 – 0.04) = 7.80

But neither is correct. I’m sorry to bother you with something that is probably so simple, but I just don’t get it ?

[jenny]

Thank you so much for your help!

The explanation is:
“An incremental cash flow is the difference in cash received or disbursed resulting from selecting one option instead of another. It is not a category of relevant cash flows.”

“Relevant cash flows are a much more reliable guide when judging capital projects, since only they provide a true measure of a project’s potential to affect shareholder value. The relevant cash flows can be divided into three categories: (1) net initial investment, (2) annual net cash flows, and (3) project termination cash flows.”

Can I completely ignore this and just remember that incremental cash flows are all given opitions?

[jenny]

Ah – now I understand! Thank you, John 🙂

[jenny]

Hi Mike,

I have only copy/pasted the question – this is what I was given. I will email the publisher – I was going crazy as I couldn’t figure out the answer. Thanks again for you help. Jenny

[jenny]

Thanks so much for the quick response. This is all the information given.
Apparently, the correct answer is d. 204000, which I don’t understand.

I think this is based on the following calculation:
opening 1,250
closing (1,096)
disposal 150
decrease revaluation (100)
=Purchase 204

I didn’t get an explanation, only “The correct answer is: $204,000”

But, this doesn’t make sense to me!? I got $96,000 (1,250-150-100-1,096)

[Author]

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