Kit mcq

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May 16, 2018 at 10:02 am #452243
humai
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Piko co anticipates that after making number of changes Minnow co will generate free cash flow of $6m next year. This is expected to grow by 4% per year. WACC is 12% and Ke is 15%
Calculate market value of equity of Minnow co using DCF
Sir the formula for free cash flow method is:
Business value = FCF (1+g) divided by (WACC – g)
So here it should be done in this way na
6(1+0.04) / (12%-4%) = 78
But the correct answer is coming 72.5. Can you please explain me this
May 17, 2018 at 3:41 pm #452466
John Moffat
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In the formula you have written, FCF is the current flow (at time ) and FCF(1+g) is the flow in 1 years time.
6 is not the current flow – it is the flow in 1 years time, so you do not need to multiply by 1.04.
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