Hi Sir
Referring to the answer sheet for question 2 (a), it mentioned that the valuation for EV clubs in year 5 onwards is multiplied by 0.636.
May i know why year 4 PV is used and what formula is this referring to? Isit similar to the dividend growth model?
Tks
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Sept/ Dec 2017 - Q2 (a)
8y ago#1We do use the dividend valuation formula (it works for any inflating perpetuity). However it only gives the PV if the first flow is in 1 years time. Here, the first flow is in 5 years time (which is 4 years later than 1 years time) and therefore the answer needs discounting for a further four years to get back to the PV now. 0.636 is the discount factor for 4 years at 12%.
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