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- This topic has 4 replies, 2 voices, and was last updated 7 months ago by John Moffat.

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- December 5, 2019 at 2:38 pm

auguechampionParticipant1. Please kindly check march/june 19 sample, q32 Pinks Co, (a), (ii).

Please I’m getting different figures for the Real Cash flow before tax as compared to what is in the published answer.

I did mine as Sales-VC-FC, all using current terms.2. It’s operational cost a relevant cash flow for NPV calculation?

3. Please do you have any video lecture or self-explanatory note on joint probability for NPV?

December 5, 2019 at 3:06 pm

auguechampionParticipant4. Please I also need clarification about the dividend theories.

In the note and other text, I see dividend irrelevance, residual, relevance (clientele, signalling). But I read the article on dividend theories and I saw some DVM, Gordon’s growth and others.

Please kindly help me out,December 5, 2019 at 4:49 pm

John MoffatKeymaster1. To get the real cash flows we need to divide the nominal cash flows by the general rate of inflation (because it is the general rate of inflation the effect the cost of capital).

In year 1, the nominal cash flow is 14,148, and therefore the real cash flow is 14,148/1.037 = 13,643. It is the same for the later year.

2. Yes

3. No. Partly because it has only been relevant two times in the whole history of the exam (and only then as part of a question), and partly because it is revision from Papers MA and PM.

However, if you are puzzled by a specific question then do ask here and I will explain (although by using the search box on this page you will probably find that I have already explained in answers to other students ðŸ™‚ )4. DVM and Gordons growth approximation are both covered in detail in my free lectures on the valuation of equity. They are nothing to do with the theories you mention. (The theories you mention relate to how companies decide on their dividend policy. The dividend valuation model (and Gordon) relate to how the market value of equity is determined.)

December 5, 2019 at 7:07 pm

auguechampionParticipantThank you very much.

Please, with reference to your answer to (3) if you could throw some light on the approach to the Joint Probability question in March/June 2018.

December 6, 2019 at 8:32 am

John MoffatKeymasterThere are 9 possible overall outcomes:

$1M in year 1 (PV of 893) followed by $2M in year 2 (PV of 1594). So total PV of 2,487

$1M in year 1 (PV of 893) followed by $3M in year 2 (PV of 2391). So total PV of 3,284

and so on.

The probability of $1M in year 1 is 0.1, and the probability of $2M in year 2 is 0.3. So the total probability of the first outcome listed above is 0.1 x 0.3 = 0.03

The probability of $1M in year 1 is 0.1 and the probability of $3M in year 2 is 0.6. So the total probability of the second outcome listed above is 0.1 x 0.6 = 0.06

and so on

To get the expected PV’s, the we multiply the outcome by the probability as normal.

So for the first outcome listed above, the expected PV is 2,487 x 0.03 = 74.6

For the second outcome listed, the expected PV is 3,284 x 0.06 = 197.0And so on

To get the NPV in each case, we subtract the initial investment of $3.5M as usual.

So the NPV for the first outcome listed above is 893 + 1,594 = 3,500 = (1.013)

For the second outcome it is 893 + 2,391 – 3,500 = (216)and so on

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