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CHIKEPE CO (MAR/JUN 18)

MSMr. smiley4y ago
Dear, Hope you can kindly help with the below query. In the question while calculating the PV of the after four years amount he used this equation 607 × 1.056/(0.08 – 0.056) × 0.735 to get 19,630 The question is why did he divided by (0.08 – 0.056) and what is the reason of calculating it in this way and is their any other method to get the same amount. Thanks in advance.
John MoffatJohn MoffatTutor4y ago#1
It is using the growth model formula that is given in the exam, which we always use for growing perpetuities (and the answer has also used it in Appendix 1 to get the current value of Foshoro). 8% is the cost of capital and 5.6% is the growth rate given in the question. It is the only way to deal with growing perpetuities (other than to prove the formula which would be a waste of time :-) ).
MSMr. smiley4y ago#2
Thanks for your answer. You mean this equation P0 = d0 (1+g) / (Ke - g)? And when ever i need to calculate a PV of growing perpetuities i shall use the same technice?
John MoffatJohn MoffatTutor4y ago#3
Yes - we always use that formula for growing perpetuities :-)
VVictoria2y ago#4
Hi, Chikepe question 1 appendix 1 when calculating equity value of Foshoro, I used FCFE method which I found quicker with CAPM instead of removing interest then calculating tax then finding FCFF then finding FCFE. However, this is not supposed to give the same answer as FCFF right? Thanks
John MoffatJohn MoffatTutor2y ago#5
No - it will not give the same answer in this question.
VVictoria2y ago#6
Great thank you sir!
John MoffatJohn MoffatTutor2y ago#7
You are welcome :-)
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