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Pike co anticipates that after making number of changes Minnow co will generate free cashflow of $6m next year. this is expected to grow by 4% per year thereafter.
The wacc of a similar company is 12%.
calculate market value of minnow co using DCF.Dear sir, my query is that they have calculated value of equity+debt as
6/(0.12-0.04)=75.i don’t understand why growth has been subtracted from wacc.
could you please clarify?They have used the dividend valuation formula.
We can use the formula to value equity, using the dividends, the cost of equity, and the dividend growth rate.
However, we can also use the same formula to calculate the PV of any cash flow that is inflating into perpetuity, by using the cash flow, the WACC, and the inflation rate.
The formula calculates the PV of an inflating perpetuity whether we use dividends (because the MV is the PV of the future dividends) or whether we use cash flows.
This is all explained in my lectures.
Sir also correct me if i’m wrong
In case we are buying another company and are asked to use asset values to value the company, we would use the market values instead of the book values(which wouldn’t be of any use to us) right?
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