- This topic has 1 reply, 2 voices, and was last updated 7 years ago by
.
- Posts
Hi John,
I have a question from Kaplan revisoin (no.75) and there is the discount factor related with money cost of capital of 20.96% (money cost of capital = 1.08×1.12) but I dont get how did they get to the discount factor of 0.8267 (first year) and 0.6835 (2nd year) if the rate is not in the PV table. Thanks for the help!
The formula for calculating the discount factors is printed at the top of the tables of discount factors.
It is (1/(1+r))^n, where r is the interest rate (0.2096) and n is the number of years (1 or 2 in your example).
However, it is very unlikely that you will be expected in the exam to calculate the discount factor precisely in Paper FM (it is only in Paper MA (was F2) that it is required). In Paper FM you use the discount factor in the tables for the nearest whole %, unless the question specifically requires you to calculate it precisely.
But, it is important that you know where the discount factors come from, for other reasons, and if you are not sure then you should watch my free lectures (and if necessary the relevant Paper MA lectures).
The lectures are a complete free course and cover everything needed to be able to pass the exam well.
- You must be logged in to reply to this topic.