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In bpp kit this qs(no.41) part b asks for valuation of the company on the basis of free cash flow to equity.in the answer theyve directly taken some values for fcfe with no calculation or explanation regarding where they came from.
Can i know how theyve arrived at these values?
Theyve only written in the answer that under the Dvm approach its calculatedI do not have a BPP kit, and so I am not sure what they have done.
However, I have the examiners question and answer.In the real exam, part (b) asked for an estimate of the growth rate using the rb model.
The In 2005, the free cash flow before reinvestment was 207.4M and the reinvestment in 2005 was 120.2M. This gives a retention rate (b) of 0.58.
Using an expected return of 10.9% (from part (a)) this gives a growth rate of 6.322% p.a.FVFE in 2005 is 87.2M and so with growth of 6.322% p.a., it will be 92.71M in 2006 (87.2 x 1.06322), and so on.
Hope that helps 🙂
Hello John, Please I still don’t understand how they arrived at the FCFE value of 87.2M. My computation is as follows.
FCFE =NCF operating activities – taxation – capital expenditure+proceeds of JV sale – repayment of secured loans + net interest received.
210 – 4.1 -120.2 +10 -31 +1.5 =66.2.
Please could you explain to me how they got 87.2.Many Thanks
As I wrote in my previous reply, I do not have the BPP answer. However I do have the examiners answer (which I guess that BPP copied – that is what they usually do).
He gets 87.2M also but there is a typing error in his workings for it!!!What it is is the 97.2 from 2005 (cash inflow before liquid resources etc) less the proceeds from the sale of interest in joint ventures of 10.0.
The reason for ignoring the joint ventures and other things is that we are trying to estimate the future FCFE and it has been assumed that these other flows will not continue in the future if they are acquired.
Hope that helps 🙂
@johnmoffat said:
As I wrote in my previous reply, I do not have the BPP answer. However I do have the examiners answer (which I guess that BPP copied – that is what they usually do).
He gets 87.2M also but there is a typing error in his workings for it!!!What it is is the 97.2 from 2005 (cash inflow before liquid resources etc) less the proceeds from the sale of interest in joint ventures of 10.0.
I can understand to this point, but it should be minus with repayment of secured bond to arrive FCFE, but in the answer, it seem to be ignored, pls. tell us why
Hope that helps 🙂
@johnmoffat said:
As I wrote in my previous reply, I do not have the BPP answer. However I do have the examiners answer (which I guess that BPP copied – that is what they usually do).
He gets 87.2M also but there is a typing error in his workings for it!!!What it is is the 97.2 from 2005 (cash inflow before liquid resources etc) less the proceeds from the sale of interest in joint ventures of 10.0.
I can understand to this point, but it should be minus with repayment of secured bond to arrive FCFE, but in the answer, it seem to be ignored, pls. tell us why
You are estimating the future FCFE and whatever they may have repaid this year does not mean that they will have the same repayment in future years.
So, the best way to deal with this type of question is based on the future repayment or assumed that there is no repayment to future cash flow, pls. advise??
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