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Sir,
Total PV of cash flows year 5 to perpetuity is calculated using P0=Do(1+g)/re-g
Re is cost of equity, that is why I discounted it using re 12.57, but the answer uses 9%. Can you explain me why is that so ?The dividend valuation formula as it stands calculates the MV of equity when D is the dividend and Re is the cost of equity.
However we use the same formula to calculate the PV of any inflating perpetuity. Here the questions wants you to use the free cash flows to the firm (not the dividends) to value the whole company (not just the equity). Therefore we use the same formula, but use the free cash flows (not the dividend) and the WACC (not the cost of equity).
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