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Hi Sir,
I have a doubt regarding the calculation of MVE of the company.In the question they have given the FCFE as 2600. I don’t understand why are they not discounting the same with ke normally when we calculate MVE we used to find the PV of the same by discounting. when I practise I have discounted the same with ke and also found the growth figure by perpetuity and calculated the PV of the same and added.(2600/1.106^1=2351)
(perpetuity growth – 42613.8/1.106^1 =38529) total MVE =40880. Could you please explain where I went wrong? Thanks in advance.I really do not know what you are doing. If the perpetuity was not growing, then you would divide by 0.106.
When it is a growing perpetuity, the most efficient way get the PV is to use the dividend growth formula from the formula sheet, as the examiner has done in his answer (and as I explain in my free lectures).
The alternative way of getting the same answer is to discount the flow without inflation at the effective/real rate of 6.1013%.
2,600 / 0.061013 = 42,614Sir,
Thank you so much for your time and effort.
So I would like to clarify few point.Please confirm whether its correct.We need to do perpetuity growth formula (DVM Formula) when they say it will grow certain percentage forever.In that case we need to discount the same to PV if the growth is not at year 1 eg if perpetuity growth is at year 3 we need to do DVM formula and discount the same with year 2 factor.
If they just give one year and mention growth we don’t need to discount to PV because DVM formula itself will give us the PV is my understanding correct?
Thanks in advance!!
If the growth starts immediately, then the dividend valuation formula will give the PV directly.
If the growth starts in (say) 3 years time, then the formula will give a PV in 2 years time and this needs discounting for 2 years to get to the PV now.
Thank you so much sir for clearing my doubt.Its clear for me now.May god bless you!!
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