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Hi,
For the 4th year onwards why are we not using the formula 1/0.04 to get the rate forever and then discounting to get the PV? I don’t understand where this formula has come from where we are using 1.04/.(010-0.04) in the exam when we are given a similar question do we always take off the rate from the cost of capital? thanks
It is an inflating perpetuity and so we get the PV by using the growth formula from the formula sheet.
Although the formula as it is given is to get the MV of a share (i.e. the PV of future dividends), and Re is the cost of equity, we can use the same formula to get the PV of any inflating perpetuity but using Re as the discount rate.
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