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Why the examiner used dividend growth rate?
Is it allowed to use dividend growth model to get the growth in PBIT? Is it right to do like this
(1230-970)/970=0.26/3=0.089How does co value is calculated?
Freecash flow will be multiplied by growth rate and discounted at Pv? Why did examiner subtracted 0.11-0.0206No it is not right (and it is not the dividend growth model!). You calculate the growth rate in the same way as we do for dividends – i.e. taking the third root, not dividing by 3.
If there is growth in perpetuity (as there is here) then you cannot inflate the flows and discount each year – it is impossible when it is a perpetuity.
We use the dividend growth formula (as the examiner has done in his answer) – it can be used to get the present value of any inflating perpetuity.
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