when finding the total market value they hane not deducted the growth rate ie they have just taken it as profit * 1+g/ cost of capital. when the formula requires you to deduct the g from the coc why is that?
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chrysos co (marc/jun 17)
2y ago#1I assume that you are referring the option 2 (the management buy out). For this, the question says that the cash flows will increase by 8% in the first year only and then stay fixed at this level.
The g in the denominator of the formula is the growth rate in the future, and in this question the growth rate in the future for this part is 0.
(Dividing by the interest rate is the normal way of discounting a non-inflating perpetuity anyway as you will remember from earlier papers. The growth formula is only needed when it is a growing perpetuity).
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