Question on inflaiton for investment appraisal

Cchucks191614y ago

Hi,

I am totally stuck and would greatly appreciate help!!

I am using the BPP textbook and it has a quesiton in it and I can't work out where they find the 15% and 25% discount rates.

Question is:

Mr Gable has just recieved a dividend of £1000 on his shareholding in x. The market value of the shares is £8000 ex div. What is the nominal cost of the equity capital, if dividends are expected ot rise because of inflaiton 10% in years 1,2 and 3 before levelling off.

The answer has PV at 15% and 25%, how did they work this out???

Thanks!

Eemitch14y ago#1

Although discount factors are given in the exam up to 20% it is a fairly easy equation to work out what the discount factor is.
1/(1+df%)n where n=number of years

(sorry there is no option to super/subscript, so n is to the power of) hope you understand

ie: 10% discount factors= so 25% discount factors

1/1.1 =0.909 1/1.25 =0.800
1/1.1squared =0.826 1/1.25 squared =0.640
1/1.1 to the power of 3=0.751 1/1.25 to power 3 =0.512

and so on. Hope this helps