Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Dec 2009 question 1 (b)
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- AuthorPosts
- March 27, 2015 at 10:24 am #239099
https://www.accaglobal.com/content/dam/acca/global/pdf/p4_2009_dec_q.pdf that’s the link to the question
Part (b) reads:
Estimate the value of the business based upon the expected free cash flow to equity and a terminal value based upon a sustainable growth rate of 3% per annum thereafter
Now all was good in part (a) where we needed to do a 3 year cash flow forecast and at the end of year three, the FCF (e) was 173 so the cash flows from year four would be 173(1.03) multiplied by an appropriate discount rate. This is a growth of 3% in perpetuity and therefore I calculated it as:
1/ (0.10 (the cost of equity) – 0.03) * DF at 10% of the year before i.e year 3 at 0.751. Getting a discount factor to use of 10.73 which multiplied by 173(1.03) to get a value form year four onwards of $1912 but the answer uses the dividend growth model to get the discount rate and they end up with a value of $2546. Why is my method wrong, I thought my method was right to get a growth in perpetuity.
Is it because this method needs to be used with the CO WACC – growth rate and I’ve used it as Ke-growth rate. Is that the reason? So if Kodiak was an equity company would this method work and it’s not working here because they have debt too?
Thank you.
March 27, 2015 at 10:51 am #239105The examiners answer gets 1912 as well!!!
2546 is the value at time 3. He has then discounted it for 3 years at 10%.
(He has discounted the total of the 173 and 2546 at time 3 and got 2043 as the present value. If you discount the two separately, then 2546 discounted for 3 years comes to 1912.) - AuthorPosts
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