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Hello,
I hope someone can help me to understand a little confusion i have!
I am using the BPP study text and am looking at business valuations. Basically there is a question which asks you to calculate the valuation when a infinity growth of 2%. The annuity to infinity formula was stated as :
1/Ke -g
but the cost of capital (Ke) in the question is 14% and the growth was 2% 1/.14-.02 isnt 8.333 which is used in the answer.
Any suggestions to how the 8.333 was calculated?
Thanks
Hello jensealey,
The problem is that you have put the 2% as a 0.2 when it should be 0.02. Try this way and you will see that the answer is 8.33
Amarain
Hello!!
Thanks so much for your help!!
I have managed to get to the 8.333 now! I was always taught in maths unless there are brackets around a addition or suntraction then you do the multiplication or division first.
Is the formula supposed to be 1/(Ke-g)? I probably had the wrong formula!!!
Thanks
Jen
Hi again,
The formula I have got for perpetuity is 1/r so I don’t know about the one you mention. Maybe yours is correct but the one I have been told is this one. I could try to have a look at the question in the book to check it. I will try to at it tonight and will give u an answer tomorrow.
Amarain
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