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Sir, could you please explain when to use the below 2 formulae:
1. FCFe x g/ (Ke – g)
2. [ FCFe (1+g) ] / (Ke-g)
Also, in the formula g=bre, what does ‘e’ stand for?
Thank you
Also(2nd), when they question says just beta, is it asset beta or equity beta?
First question:
I don’t know where you have seen the first formula. If we are calculating the PV of a perpetuity of FCFE’s then it is the second formula (the same formula as on the formula sheet for dividend valuations, which can be applied to get the PV of any inflating perpetuity).
Second question:
This is really an F9 thing. The growth rate is the proportion retained multiplied by the rate of return on reinvestment.
Re is the rate of return on reinvestment, but if we do not know what that is, then we assume it to be the return to shareholders (equity) and so the ‘e’ stands for equity.sir can you tell me why an intrinsic value can’t be negative and if its negative why we write it as zero,
I assume that you are asking about options (but if you are then in future please start a new thread – this had nothing at all to do with the earlier question in this thread!!!)
If the intrinsic value is negative then why would anybody consider buying the option? They wouldn’t, and therefore it has no value.
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