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I am quoting the question,
“It proposes that the required finance is obtained from a
combination of funds received from the sale of its equity investment in a European
company and from cash flows generated from its normal business activity in the coming
The question states that the project will be funded in two ways – cashflows from biz of 2 years and receipts from Europe. I don’t understand why we have to take two years of cash flows when the receipts from Europe coming in 2016 and the cash flows for the year ended 2017 is way more than enough to fund the investment.
Or do they mean year 1 = receipt from Europe and year 2 = dividend capacity making it cashflows from 2 years?
The question is not saying that they will use all of the cash flows from the normal business activity. They will use the funds generated from the sale of the investment and get the rest needed from cash flows from the normal activity.
yes, but when we are calculating the dividend for the year ended 2017 – we take it as the amount after funding the project.
This means that the project is funded solely from the “sale of equity investment” and the “operating cash flow of 2017”, the leftover which is distributed as dividend for the year.
What’s the need for year 2 cash flow?
It is because we need to calculate the market value of the shares with and without the new project, which is the PV of the future expected dividends.
Okay, thank you sir.
You are welcome 🙂