june 2011 BRT co part b

The answer has used the dividend growth formula from the formula sheet – Po = Do (1 + g) / (r – g)

Even though the formula is usually used for growing dividends, the same formula can be used for any flow with growth.

However, usually we use the flow at time 0 and get a value at time 0. In this case the constant growth starts at time 4, so we use the flow at time 4 and get a value at time 4. To get a value now, we then need to discount the result for 4 years using the 4 year discount factor.

Because it is not clear in the question whether the flow will have inflated in year 5 or whether it will be the same as in year 4.

So either answer was acceptable.