Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › CHIKEPE CO (MAR/JUN 18)

- This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.

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- August 2, 2021 at 8:07 am #630094
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.

August 2, 2021 at 12:45 pm #630129It 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 🙂 ).

August 2, 2021 at 1:30 pm #630138Thanks 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?

August 2, 2021 at 1:43 pm #630148Yes – we always use that formula for growing perpetuities 🙂

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