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Calculating the value through Management buy out for MBU
Estimated value = ($435m x 1·08)/0·10 = $4,698mCalculating the value for Mining and shipping unit
Estimated corporate value = ($3,688m x 1·04)/(0·12 – 0·04) = $47,944mWhy was the growth rate not taken in MBU while it was taken for M&S unit in the formula denominator?
The cash flow grows only in the first year at 8% for MBU and remains constant while the cash flows grow in perpetuity for M&S unit at 4%. Is this the reason?Yes, that is the reason.
When it is a growing perpetuity we can use the dividend growth formula (it works for any growing perpetuity).
Hi John,
When calculating value of mining and shipping business unit, why are we deducting the bank overdraft amount, when the question clearly says that the other debt under NCL will be repaid? It’s on mining and shipping business unit paragraph.
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