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Hi,
Sorry having a memory blank and am stuck on answering the above question with the PV after 4 years,
the answer shows ( 4443 x 1.03/(0.13-0.3)) * 1.13-4
I knows is 4443 * growth rate 1.03. buts what’s the 0.13-0.03 for?
Thanks for any help,
It is using the dividend valuation formula (from the formula sheet), which can be used for any flow that is growing in perpetuity.
0.13 is the discount rate, and 0.03 is the growth rate.
The reason for the extra term at the end (1.13^(-4)) is that because the perpetuity starts 4 years ‘late’ we need to discount by 4 more years at 13% to get back to present value. (and it would make more sense to get the discount factor from the tables rather than calculate it 🙂 )
Thanks for your help, I didn’t read the material correctly, and thought it was another 4 years and half growth instead of to perpetuity, so makes sense now,
Teach me to read properly,
Thanks
Dear John,
When calculating the premium required to acquire Fodder ,how does the equity value $36086000 get?
Thanks,
The total value of Fodder is $40,104.
From the question, the debt equity ratio is 10:90, and therefore the value of the equity is 90%.
90% x 40,104 = 36093.6
(I am not sure where you are getting 36086 from)The operating profit in 2011 was 5169. It is growing at 6%
Therefore next year will be 5169 x 1.06 = 5479.
At time 2, 5169 x 1.06^2 = 5808and so on 🙂
I can only see the question said ” Fodder Co’s sales revenue will grow at the same average rate as the previous years. ”
Is it the assumption that the operating profit will grow at 6%.
Thank you
Hi sorry to kick off an old post but thought it’d be best to keep it in one place.
Could you breakdown how the DVM formula is being used?
The growth rate is 30% why is 0.03 used in the formula instead of 0.3?
Also, on part b the combined growth rate used is 29% struggling to see how that is determined.
30% is the profit margin on sales, not the growth rate of cash flows.
The question says that the cash flow growth rate will be half the sales revenue growth rate which is 6.02% (16146/13550 – 1). 1/2 x 6.02%% = 3.01% (approximating to 3%).
The combined growth rate is (per the question) half of the sales revenue growth rate of 5.8%. 1/2 x 5.8% = 2.9% (not 29% !!!!)
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