ACCA AFM · Guided practice (Show me how)
Chapter 16: The Valuation of Acquisitions and Mergers
Free cash flow valuation: the firm, the equity and a growing perpetuity
(a) A company forecasts free cash flows at the next 3 consecutive annual dates of $4.5 million, $8.1 million and $11.7 million. Thereafter the last flow grows at 4% a year for ever. Market debt is $50 million and the relevant cost of capital is 10%. Published discount factors for the consecutive annual dates are 0.909, 0.826 and 0.751. Report each annual and terminal PV to three decimal places before summing. Report the terminal-value answer to one decimal place, retaining the full calculation for its PV.
(b) For a separate free-cash-flow calculation, the quoted accounting figures are: operating profit (EBIT) 720; depreciation 288; increase in working capital 120; new non-current assets 36; interest paid 12; loans repaid 48; and tax paid 336. Replacement of existing non-current assets equals depreciation.
(c) Using the same accounting figures, calculate free cash flow to equity.
(a) Value the explicit years
Calculate the present values of the three explicit annual free cash flows.
(a) Value the growing perpetuity, the firm and the equity
Calculate the terminal value, its present value, the firm value and the equity value.
(b) and (c) Free cash flow from accounting figures
Calculate operating cash flow, free cash flow to the firm and free cash flow to equity from the accounting figures.
Opening this exercise…