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- This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.

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- December 2, 2015 at 7:16 am #286878
Hello Mr JM am a bit confused with the terminology used by the examiner in Question BRT CO part b asking to calculate after tax cash flow using perpetuity.

I have a doubt concerning the fisher formula. When question contains both General and specific inflation, should be use the formula to find the money rate?

plz hlpDecember 2, 2015 at 8:20 am #286901Depending on what is needed, the formula can be used to find the nominal (actual) cost of capital if the real cost of capital is given, or can be used to find the real cost of capital if the nominal (actual) cost of capital is given.

Always, it is the general rate of inflation that is relevant when using this formula.i is the nominal (actual) cost of capital

r is the real cost of capital (the rate if there were no inflation)

h is the general inflation rateIn part (b) of BRT, because it is a perpetuity and there is no inflation after year 4, we discount at the nominal cost of capital of 12% and the discount factor is 1/0.12

However, this factor would assume that the perpetuity started at time 1. Because in fact it doesn’t start until time 4 (which is 3 years later than time 1) we then need to discount for 3 years at 12% to get back to the PV.Our free lectures on DCF with inflation will help you. (Our lectures are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.)

December 3, 2015 at 11:40 am #287219Thanks sir. I have seen the majority of your lectures but still cant attemp GXG co (june 13). Please tell me where i can seek explanations in your lectures 🙁

December 3, 2015 at 3:12 pm #287288I am astonished that you cannot even attempt GXG if you have watched all of our lectures.

The lectures are a complete course and are designed to all be watched in order – not simply individual chapters.

As always in the exam, one question tests several different techniques in the same question and the techniques are covered in different chapters.Part (a) tests the dividend valuation model, coupled with the fact the the market value of a share is the present value of expected future dividends. All of this is covered in the lectures.

EPS and interest cover for part (b) are both revised in the lectures (although most of what is needed is basic financial accounts knowledge).

The explanation and relative metres of traded bonds, equity issues, and venture capital for part (c) are also all explained in the lectures together with the Lecture Notes.Since you say you have not watched all of the lectures, you have presumably been using a Study Text instead. In which case I am again astonished that you cannot even attempt this question.

This is a professional exam and is at a higher level than university exams. The only way to pass is to study everything thoroughly and to make sure you understand everything properly before attempting questions. Learning rules is not enough – the questions are always designed to test that you understand the topics and have not simply learned rules.

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