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) = (305x1.03)/(0.12-0.03)=3,489.
Why was the answer there is 2219. Please clarify, thanks.
Ask the Tutor ACCA AFM
Business valuations technical articles
8y ago#1You 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)
so that means the formula can be expanded as [D4(1+g)@wacc]/(r-g)?okay, i think i get it.
Thanks sir.
8y ago#3Correct. :-)
This topic is locked — no new replies.