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Hello Sir, could you help m eunderstand for part (c) that what in the question makes it evident for us to grasp that net asset valuation specifically dividend valuation metho sis to be used? all this while I was trying to use FCF method which isn’t done here.
Because the question asks for discussion (with calculations) then ideally you should consider all of the different valuation methods and then discuss round it.
The net assets valuation is easy and note (iii) in the question is what most gives the clue to calculating the value on this basis.
A free cash flow to equity (i.e. a dividend valuation) obviously needs more work, but is suggested by the fact that the question finishes by specifically stating what the new cost of equity would be.
A third alternative would indeed be a free cash flow to the firm valuation (discounting the earnings at the new WACC and then subtracting the debt). If you had done this then you would still get credit for it. However that would mean a lot more work, and always keep in mind the number of marks allocated – it was only 8 marks and so the extra time needed would not really have been warranted.
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