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Valuation of acquistions and mergers chapter 16 example 1

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Valuation of acquistions and mergers chapter 16 example 1

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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  • March 4, 2018 at 4:59 pm #440131
    kkhatani
    Member
    • Topics: 43
    • Replies: 14
    • ☆☆

    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

    March 4, 2018 at 5:49 pm #440155
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    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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