December 2010 Q1

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    htung00
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    For proposal 3: buy out

    Tthe value of the company was calculated as follows in the suggested answer:

    Estimated value based on cash flows to perpetuity = 28·4/(0·11 – 0·05) = $473·3m

    The forumla looks like the normal growth model formula except the numerator isn’t being multiplied by (1+g) the growth in the question was only applicable to profits before depreciation and not to the cash flow.

    How did the come to this forumal from the normal growth model?

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