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Hello
I understand adding y 1,2 and 3 at the relevant discounted rates. Thereafter is y4 and i would have thought that you take the 11.7 x 1.04 to get 12.16 and then discount that at y4 which is 0.682 and then divide by 0.06. You have discounted the sum of y1, 2 and 3 at their relevant df years and then year 4 you have discounted at y3 rate of 0.751. I am sure you are right but it is confusing
Using the annuity factor discounts flows from time 1 onwards to get a PV at time 0.
If the first flow it at time 4, then this is three years later than time 1, and so using the annuity factor will give a PV at time 3. Therefore we need to discount the answer for 3 years to to get a PV at time 0.
Do watch the Paper F2 lectures on discounting, where this is explained with examples.
I do understand that part. i do not understand why the 3rd year is discounted at the same factor as the figure used for the perpetuity. i would have thought the perpetuity figure would have been done at y4 discount
Sorry I must have been dreaming when I answered before.
The perpetuity is from 4 to infinity. It is an inflating perpetuity and so as is written in the answer we use the dividend growth formula to discount it. When the first flow is at time 1, we use the formula to get the PV at time 0, and Do is the dividend at time 0.
Here the first flow is at time 4, 3 years later, so Do becomes the dividend at time 3, and the formula give the PV at time 3. We then discount for 3 years to get back to a PV at time 0.
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