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2014 June Q3 (c)

Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › 2014 June Q3 (c)

  • This topic has 5 replies, 5 voices, and was last updated 7 years ago by abdelbagi2004.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • December 1, 2015 at 11:16 pm #286845
    faniacca
    Member
    • Topics: 9
    • Replies: 9
    • ☆

    Dear sir,

    I have question on examer’s answer regarding the calculation of value of Ndege.

    In examiner’s answer :
    Add: present value of cash flows from year 2 onwards:
    ($9·14m x 1·052)/(0·1 – 0·052) x 0.909=182·11m

    Why calculate the year 2’s PV still using year 1’s discount factor? Why not using 0.826 here?

    Thank you

    December 1, 2015 at 11:41 pm #286847
    elomi
    Member
    • Topics: 4
    • Replies: 17
    • ☆

    Dear Faniacca,

    There reason is very simple. May be the Free Cash Flow from year 2 will increase by 5.2% into infinity and the the cost of capital is 10. There to get the value of the cash flow now the Free Cash Flow at year 2 will grow at 5.2% and you divide it by the cost of capital less the growth (5.2%) and multiply by the discount at the base year. In the question above the base year is year one.

    This is you can understand from the valuation of share price with the growth from your F9.

    Thanks and best regards.

    Elomi, MT.

    December 2, 2015 at 9:36 am #286927
    faniacca
    Member
    • Topics: 9
    • Replies: 9
    • ☆

    Of course I know the share growth model. That is not my question. The year 1cash flow is discounted by 1 year discount factor which is 0.909. But why year 2 still using the I year discount factor 0.909. Discount that terminal value to present time shouldn’t it use 0.826.

    Thanks for your reply, but you don’t get what I mean.

    December 2, 2015 at 10:35 am #286940
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51583
    • ☆☆☆☆☆

    faniacca:

    If you wish for me to answer then you should post in the P4 Ask the Tutor Forum – this forum is for students to help each other.

    December 3, 2015 at 6:27 am #287121
    gulam007
    Member
    • Topics: 31
    • Replies: 47
    • ☆☆

    Maybe the infinity starts from Yr 2

    December 5, 2015 at 5:40 pm #287951
    abdelbagi2004
    Member
    • Topics: 3
    • Replies: 92
    • ☆☆

    yes as the note (v) in the question ndege co free cash flows grow buy 20% in first year and then buy 5.2 % annually thereafter
    so it is infinity from yrar 2 that use the discut facter of base year which year 1 0.909

  • Author
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