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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.
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 🙂 ).
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?
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