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Dear Sir,
In Wurrall question, the share price is calculated in the book as below:
20×5. 20×6. 20×7. 20×8
Free cashflow. 344 371 395 419
PV of free CF as at 31/3/20×8 is: 419 x 1.06/(0.11-0.06) = 8,883 mil
Loan at 31/3/20×8. (900)
Free CF 7,983 mil
share price = 7,983 mil/ 2,400 mil shares = 333 cents per share.Question: 8,883 mil in above calculation is the terminal value from year 20×9 onward. why do we ignore the CF before 20×9? ei. CF from 20×5 to 20×8.
Thanks,You have not read the answer carefully enough because is says that 333 cents per share is the estimate of the share price at 31.03.20X8
The current share price is given in the question, and the reason for estimating the price at 31.03.20X8 is because the managing director has publicly stated that the share price should increase by at least 100% during the next four years. Therefore we need to estimate the price in 4 years time to see if his statement is likely to be true.
(In future, please ask in the Ask the Tutor Forum if you want me to answer. This forum is for students to help each other.)
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