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Hello Sir,
I’m referring to the question in p4 technical article “Business valuations”.
The question has stated that beyond 2017, the free cash flows of the firm are expected to grow by 3% indefinitely.
As per my understanding that is from 2018 on wards, which is period 5 according the question.
However this has been discounted at period 4 discount rate of 0.636, shouldn’t this be discounted at period 5 discount rate of 0.567.
I have come across a similar solution in a question from the BPP study text.
Would you please explain the logic behind this?
Many thanks.
When the flow is from time 1 onwards, then using the formula gives the PV ‘now’ (time 0).
If the first flow is in 5 years time, then that is 4 years later than time 1, and so the formula gives an answer 4 years later – i.e. at time 4 instead of at time 0. Therefore to get the the value ‘now’ we need to discount for 4 years.
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