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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
We 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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