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Hi,
Sir my question is a bit of clarifying principle really. When calculating the present value of cashflows from year 2 onwards it is done by ($9.14 x 1.052)/(0.1-0.052). I don’t understand this part of the solution. i have come across a number of questions which use the same way. Can you please explain this concept to me. Thank youIt is using the dividend valuation formula from the formula sheet.
You can use it for discounting any inflating perpetuity (not just dividend flows).
Do is the current flow, g is the inflation rate, and r is the discount rate.
Thank you so much and this may seem a bit silly but one more thing, why do we further discount it then when the perpetuity has been calculated.
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