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Hi sir
can you please explain me this problem
A Co is considering acquiring the ordinary share capital of cew co. cew has for years generated an annual cash inflow of 10m . for a one off investment of 6M in new machinery , earnings for CEW can be increased by 2M per annum . ACo has a cost of capital of 10%.
What is the value of CEW co?
Ans . 114 Million . I don get how they arrived at this figure . Plz explain , thank youGiven that the future cash inflows will be 12M per annum in perpetuity, the value of the company (excluding the new investment) will be 12M/0.1 = 120M
However there is new investment of 6M which will reduce the value by 6M.
Therefore the new value = 120M – 6M – 114M
(I assume that you have watched my free lectures? They are a complete free course for Paper Fm and cover everything needed to be able to pass the exam well.)
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