Equity Reading 38

CFA Level II Equities
#1

Hello!

Can someone comment on step-by-step example in Reading 38, dealing with the DCF valuation under inflation factors:

Last step in the valuation for Real terms projection:

  • FCF for year 25 = 170, given continuos growth factor of 2%, CV = (170*1.02)/(0.06) = 2891

  • Discount factor for year 25 is 0.16 (1/1.08^24)

  • Given FCFs for years 2, 3, 4, and 5 = 97, 113, 114, 116, and appropriate discount factors 0.93, 0.86, 0.79, and 0.74.

The DCF value given in the book is 1,795. How do I reach this number???

In my understanding, we just sum the discounted items that are given, in which case the answer is much lower.

Thanks!

#2

I love this reading - so many combinations. I was “playing” with the data and I found fitting solution in adjusted value-driver formula for FCF real. My calculation for FCF is 167.43 rounded to 167 times inflation index 10.75 give nominal DCF value of 1,795. The DCF real is equal DCF nominal, so… I must admit that I am not 100% sure about this, but this can be one of the potential answers.