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growth rate to perpetuity

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › growth rate to perpetuity

  • This topic has 1 reply, 2 voices, and was last updated 2 months ago by John Moffat.
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  • May 24, 2022 at 11:33 am #656318
    zzzzzzzzzz
    • Topics: 3
    • Replies: 0
    • ☆

    TAC estimates that the delivery and runner service business of eThunder will continue to grow after the takeover, with its revenue growing at a rate of 10% per year for the first four years after takeover, before stabilising to a growth rate of 4% per year to perpetuity thereafter.
    Ans:
    Year 1 2 3 4
    FCFF 250 275 303 332
    DF 8% 0.926 0.857 0.794 0.735
    PV 232 236 241 244
    PV from year 5 onwards = 244 (1.04)/ (0.08 – 0.04) x 0.735 = 4663
    Firm value now 232 + 236 + 241 + 244 + 4663 = 5616
    Less: Debt value now (2000)
    Equity value =3616

    My question: Why the calculation of PV for yr5 is using 244 but not 332?

    May 24, 2022 at 1:16 pm #656333
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 50034
    • ☆☆☆☆☆

    By all means use 332, but since the perpetuity starts 4 years late, the answer from the formula needs discounting for 4 years, which ends up giving the same answer.

    Again, this is all explained in my free lectures 🙂

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