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Dear Sir, thanks very much for the support.
Please I have a problem with discounting in perpetuity using the growth formula (my =Do(1+g)/re-g ) Well I know how to apply this, my problem is that in the kaplan kit, it goes further, to calculate growth after a number of years.Ex: Eview Cinemas.
Calculating PV from year 5 onwards.
= 490×1.052/(0.12-0.052)×0.636I don’t understand where that 0.636 is from.
Thanks very much Sir, waiting for response.
The formula gives the PV ‘now’ – time 0 – if the first dividend is in 1 years time.
Here, the first of the growing dividends is in 5 years time, which is 4 years later than in 1 years time.
Therefore the formula gives a present value in 4 years time (4 years later than ‘now’) and so the answer from the formula needs discounting for 4 years to get a PV ‘now’ (time 0). 0.636 is the discount factor for 4 years as 12%.
If you are still unsure then do watch the free Paper FM lectures on the valuation of equity, because this is revision from Paper FM and I work through several similar examples in the lectures.
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Thank you very very much Sir.
Very well understood and makes alot of sense.
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