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Business valuations

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Business valuations

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
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    Posts
  • April 28, 2021 at 11:33 am #619068
    andreaskraken
    Member
    • Topics: 57
    • Replies: 30
    • ☆☆

    NCW Co is considering acquiring the ordinary share capital of CEW Co. CEW Co has for years generated an annual cash inflow of $10m. For a one-off investment of $6m in new machinery, earnings for CEW Co can be increased by $2m per year. NCW Co has a cost of capital of 10%.
    What is the value of CEW Co?
    ? $114million
    ? $120million
    ? $100 million
    ? $94 million

    For this question are we supposed to use the discounted cash flow basis method??

    So far all I could get was the cashflow of 10+2=12
    I did not have any idea in how to approach further than this

    April 28, 2021 at 1:51 pm #619083
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51585
    • ☆☆☆☆☆

    Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers and explanations
    🙂

    On the information available then can only value the company based on the PV of the future flows.

    The new flows will be $12M per year in perpetuity and so discount the perpetuity in the normal way at the cost of capital of 10%.

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