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Greetings John,
1. why bother adding back depreciation if we subtract it as maintenance?
2. if we use the profit for one year + inflation, i understand we use the dividend growth formula. but what do we discount it as? one year? or a perpetuity?
Thank you.
1. If the depreciation is the same as the amount spent on maintaining assets, then we do not add it back. However it depends on the wording of the question and any assumptions made.
2. I do not understand you. The dividend growth formula is discounting an inflating perpetuity starting in 1 years time.
thanks John, sorry for any confusion.
for 2, i meant if we have a profit for the first year and the questions says “the profit will stay the same but increase with x% inflation per year”, the first step would be to use the dividend growth formula. then how would we discount for the following years?
The dividend growth formula is discounting an inflating perpetuity.
So in the formula you would use the profit in the first year instead of Do(1+g).
g is the rate of inflation, and re is the discount rate.I do explain this in my free lectures.
thanks for explaining further, John.
I understand now- there is no need for further discounting in that instance.
(I did watch the lecture, and this question arose after watching it)
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