FMChapter 8 practice questions - relevant cash flow for DCF

The questions appear in a random order - question 5 will not always appear as question 5 - so please give me a clue as to which question you are asking about and then I will help you.

Because it is an inflating perpetuity you have to discount the current price flow (5,000 per year) at the real (or effective) discount rate. The real rate = 1.12/1.04 - 1 = 0.076923 (or 7.6923%) Discounting the perpetuity at this rate gives: 5,000 / 0.076923 = 65,000 (Alternatively you can use the dividend valuation formula - it works for any inflating perpetuity (not only dividends). So PV = (5,000 x 1.04) / (0.12 - 0.04) = 65,000 )

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