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John Moffat.
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abdelrahmanhassan
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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 Moffat
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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 🙂 ).
abdelrahmanhassan
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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 Moffat
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Yes – we always use that formula for growing perpetuities 🙂
abdelrahmanhassan
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