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Business valuations technical articles

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Business valuations technical articles

  • 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
  • June 3, 2018 at 7:50 am #455678
    amirulez
    Member
    • Topics: 4
    • Replies: 14
    • ☆

    Hi sir,

    In calculating the free cash flow to equity, for year 2018, in the article it shows the calculation in note 9, (1/(0.12-013) x 0.636).

    Wasn’t the formula for calculating present value for growing perpetuity is [D0(1+g)]/(r-g) = (305×1.03)/(0.12-0.03)=3,489.

    Why was the answer there is 2219. Please clarify, thanks.

    June 3, 2018 at 10:16 am #455720
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are right about the formula, but the Do(1+g) on the top of the formula is the same as the dividend in 1 years time (i.e. the current dividend with 1 years growth).

    Here, the first of the ‘growing’ dividends is at time 5 and so this goes on the top of the formula.
    Had the first dividend been in 1 years time, then the formula would give the PV now. However since the first dividend is in 5 years time (4 years later), the PV is 4 years later as well, so at time 4 instead of time 0. Therefore we then need to discount for 4 years at 12% (and the 4 year discount factor at 12% is 0.636)

    June 3, 2018 at 10:21 am #455723
    amirulez
    Member
    • Topics: 4
    • Replies: 14
    • ☆

    so that means the formula can be expanded as [D4(1+g)@wacc]/(r-g)?okay, i think i get it.

    Thanks sir.

    June 3, 2018 at 10:21 am #455726
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Correct. 🙂

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  • The topic ‘Business valuations technical articles’ is closed to new replies.

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