Vogel Co. June 2014 Question 3

This topic has 3 replies, 2 voices, and was last updated 10 years ago by John Moffat.

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February 17, 2016 at 10:17 am #300791
shamzz
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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 you
February 17, 2016 at 3:14 pm #300822
John Moffat
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It 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.
February 18, 2016 at 7:39 pm #301071
shamzz
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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.
February 18, 2016 at 8:58 pm #301087
John Moffat
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Calculating the perpetuity only gives the PV if the first flow is in one years time.
If the first flow is later, so in this example in 2 years time, then because it is one year later we need to discount by an extra year to get back to a PV now.
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