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2014 June Q3

Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › 2014 June Q3

  • This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • December 2, 2015 at 9:51 am #286931
    faniacca
    Member
    • Topics: 9
    • Replies: 9
    • ☆

    Dear John,

    Value of spinning off department B:

    Present value of year 1 $7.62m X 120% X 0.909 = $8.31m
    Present value of year 2 onwards $9.14m X (1+5.2%)/(10%-5.2%) x 0.909= $ 182.11

    The year 1cash flow is discounted by 1 year discount factor which is 0.909. But why year 2 still using the 1 year discount factor 0.909. Discount that terminal value to present time shouldn’t it use 0.826?

    Thank you

    December 2, 2015 at 10:43 am #286944
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    I will answer this, but in future you must use the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.

    You are happy (I think) about using the dividend valuation formula in order to get the present value of an inflating perpetuity.
    However that formula gives the present value on the basis that the first flow is in 1 years time. Here, the first flow is in 2 years time (1 year later than time 1) and therefore the formula gives a PV one year later as well (at time 1 instead of at time 0). So we need to discount the answer by 1 year to account for the fact that it is one year later.

    Hope that helps 🙂

    December 2, 2015 at 12:45 pm #286975
    faniacca
    Member
    • Topics: 9
    • Replies: 9
    • ☆

    Thank you very much, sir. It’s clear for me now.

    I’m ll post my question as your request in the future.

    December 2, 2015 at 2:50 pm #286999
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    Great 🙂

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    Posts
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