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  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • August 2, 2021 at 8:07 am #630094
    abdelrahmanhassan
    Member
    • Topics: 3
    • Replies: 6
    • ☆

    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 #630129
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51543
    • ☆☆☆☆☆

    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 🙂 ).

    August 2, 2021 at 1:30 pm #630138
    abdelrahmanhassan
    Member
    • Topics: 3
    • Replies: 6
    • ☆

    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?

    August 2, 2021 at 1:43 pm #630148
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51543
    • ☆☆☆☆☆

    Yes – we always use that formula for growing perpetuities 🙂

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