Mlima June 13 Q1

With regard to the year 5 onwards cash flows, he has used the dividend valuation model (MV = (D0 x (1+g)) / (Re-g) ) You can use this for any inflating perpetuity, with Do being the cash flow and Re being the discount rate. With regard to the use of the M&M formula, I think from memory that this is the only time he has used it in any of his answers. However, you could instead have used the asset beta formula (calculating the beta first). You always could and so would never be forced to use the MM formula.

Thanks John - I didnt spot the Div Growth model - that part is fine but why does he multiply answer of DGM by 4th root of 1.11 Also on this Question - appx 3 - re Subsidy - it that the normal interest rate the co. would pay 7% less the discounted interest rate 3% on the loan offered by the government - non cash but a saving which increases the free cashflow value to give PV of the project ??? re where does he get the 7% yeild to maturity on the unsecured bonds thanks for all the assistance

The growth starts four years late and therefore the answer needs discount for 4 years at 11%. (It is not the fourth root - it is (1/1.11)^4 ) 7% is given in the question as the cost of future borrowing. For APV that tax shield is calculate using the 7%. In addition there is the benefit of the subsidy of 7% - 3% (less the tax saving so the tax benefit is not counted twice).

Thanks John - can you just clarify the first point ? can I use the DF tables given @ 11% for 4 yrs - 0.659 this doesnt match with the answer given- sorry I cant recall the maths here

Yes you can. (1/1.11)^4 does equal 0.659 (to three decimal places). If you do it to more decimal places then the answer will be a little different, but that is rounding and rounding doesn't lose any marks in the exam.