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Calculating the value of company B By reference of its predicted earnings
The formula they given in book is
Earnings(1+g)/ eaenung yeild-g
But in the question they have used: earrings/ earning yeild-g.
Earnings are expected to be 12.5 million next year and expected to grow 2% and earning yeild is 12%.
Ans is 125m but following the actual formula answer comes to 127m.
It’s section b ot question, will they still give mark?
The correct answer is 125m, and there would be zero marks for answering as 127m.
The numerator of the formula (earnings(1+g)) is the earnings in 1 years time, which is the current earnings with growth.
Here, the question says that the earnings in one years time are 12.5 million and so we do not need to multiply by (1 + g)