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Dear sir,
I am a little bit confused regarding the present value of c.fs in perpetuity sir my concern is that full information is provided for year 4 so why do we use year 3 cashflows for the value of equity value plus we also take the pv of only 3 years rather than 4 years as we usually do. Because it is 4 years onwards not 3 years onwards????
Kindly resolve this confusion I will be very thankful sirUsually when we use the growth formula it is for flows starting in 1 years time, and Do in the formula is the current flow (i.e. the amount at time 0). The formula then gives the PV at time 0.
Here, the first flow is 4 years time (which is 3 years later than time 1) and therefore for Do in the formula we use the amount of the flow 3 years later than time 0 i.e. at time 3. The result from the formula is 3 years later than time 0 ie at time 3, and so needs discounting for 3 year.
sir but how can get it that this approach we need to use rather than the normal method???
But it is the normal method for any growing perpetuity.
Again, the growth formula gives the present value when the perpetuity starts at time 1. If it starts at a later date then we need to do as explained in my previous reply.
sir in this question nothing is mentioned that perpetuity will start at a later time as you said. Hence, my concern is simply how can I get it in exam whether I need to use this method or that as if I compare this question with westparley (mar 20) question nothing is different in respect to free cashflow information (except it is written 4 years onwards in this question and in westparley it is written that after 4 years the only I found is of onwards and after) may I assuming correctly?
The formula applies when there is constant growth. In newimber the constant growth is stated in the question as being from year 4 onwards.
In Westparley the constant growth is stated as being after 4 years.
Thank you so much sir for your passions and explanation I must say you are an amazing tutor. sir just last thing it means we will apply formula in newimber after 3 years because constant growth from 4 years but in westparley constant growth is started after 4 years therefore we apply after 4 years formula right?
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