TAC estimates that the delivery and runner service business of eThunder will continue to grow after the takeover, with its revenue growing at a rate of 10% per year for the first four years after takeover, before stabilising to a growth rate of 4% per year to perpetuity thereafter.
Ans:
Year 1 2 3 4
FCFF 250 275 303 332
DF 8% 0.926 0.857 0.794 0.735
PV 232 236 241 244
PV from year 5 onwards = 244 (1.04)/ (0.08 – 0.04) x 0.735 = 4663
Firm value now 232 + 236 + 241 + 244 + 4663 = 5616
Less: Debt value now (2000)
Equity value =3616
My question: Why the calculation of PV for yr5 is using 244 but not 332?
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growth rate to perpetuity
4y ago#1By all means use 332, but since the perpetuity starts 4 years late, the answer from the formula needs discounting for 4 years, which ends up giving the same answer.
Again, this is all explained in my free lectures :-)
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