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403 Paper 2 question 1

C

Confused1985

Member
In the exam solutions it gives the answer to part (iii) as £750m using the perpetuity formula PV = A/(i-g) = 37.5/(0.15-0.1) = £750m but in the block tutorial solutions they give the answer as:
37.5*(1/(1-(1.1/1.15))) = £862.5m.

Why is this?
 
Either method would be ok, as long as you say what you're doing. The figure is pretty much up in the air anyway!

It's all to do with whether the starting dividend is that payable now or that payable in a year's time. And also whether you're calculating the value now of the perpetuity, or the value in a year's time. I think you'll find that there's a difference of 'v' (ie 1/1+i) between the two figures.
 
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