Burcolene ( dec 07 adapted)

The fact that there are options held by employees means that there is a future liability of the company and therefore the value of the company is reduced by that liability. If you are referring to the attrition rate of 5% (as opposed to the earnings growth rate of 5%) then stating it as attrition rate in the question automatically means 5% per year. The difference between $12.855 and $13.1 is 1.9% of $13.1. The difference between $11.873 and $12.5 is 5% of $12.5. The calculation of the WACC depends on the market values of debt and equity, but they will change as the WACC changes. So it goes round in circles and will mean keep repeating the process - iterative is the word for keep repeating. There was no part (c) in the original exam question.

Hi sir , the one you mentioned "The fact that there are options held by employees means that there is a future liability of the company and therefore the value of the company is reduced by that liability." what do you mean by liability ? can you give an example .. Thank you in advance ...

This is really testing something you should have covered in the advanced financial accounting paper. The company has granted options to employees which will allow them to buy shares at a fixed price of $22 per share. When the employees exercise the options then the company will have to buy share at whatever the actual market value is at the time, and sell them to the employees for $22. So if they were exercisable today, it would cost the company $7.31 per share. They are not exercisable today but at a future date and the question has given the time value to take account of this. It is a future liability because it will cost the company money on the future date.

thank you sir :D

You are welcome.