Hi, I am a bit unsure about the discounting. For example 2, senario 2, 70% debt and 30% equity, the lecturer said it's perpetuity, and divided by 5% the Risk free rate. --- my question is, why the formula is PV = FV/ r = 0.45/5% = 9 million ---- why it's not PV = FV/ (1+r)^n = 0.45/ (1+5%)=0.43 million
The discount factor for a perpetuity is 1/r. The formula you quote is for discounting just one single flow. I really suggest that you watch our free Paper MA (was F2) lectures on investment appraisal, because this is revision of Paper MA (and Paper FM).
Hi, I am a bit unsure about the discounting. For example 2, senario 2, 70% debt and 30% equity, the lecturer said it's perpetuity, and divided by 5% the Risk free rate. --- my question is, why the formula is PV = FV/ r = 0.45/5% = 9 million ---- why it's not PV = FV/ (1+r)^n = 0.45/ (1+5%)=0.43 million
The discount factor for a perpetuity is 1/r. The formula you quote is for discounting just one single flow. I really suggest that you watch our free Paper MA (was F2) lectures on investment appraisal, because this is revision of Paper MA (and Paper FM).
@@opentuition Thanks a mill for your response, I will have a look at MA videos. : )