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mlima co. (june13)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › mlima co. (june13)

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by John Moffat.
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  • February 18, 2021 at 2:39 am #610796
    Noah098
    Member
    • Topics: 935
    • Replies: 352
    • ☆☆☆☆☆

    sir in this question we find out MV/share using FCF to firm, for 2 reasons, one that we are told that debt is repaid instantly and two we are given ungeared cost of equity, which means we assume that there is no debt, and hence no interest to be deducted to arrive at taxable profits or no MV of debt to be deducted from PV of future cash flows.

    However i wanted to confirm my understanding under two hypothetical could-be scenarios,

    Scenario 1
    If we had been given cost of equity(found using beta equity) and told that debt won’t be repaid before the IPO then we would have deducted interest to arrive at taxable profits, right? And then using ke as discount rate we would have directly arrived at FCF to equity. And based not this we would have found the MV/share, right?

    Scenario2
    Again here too IF debt won’t be repaid and this time if we are provided with WACC then, no interest will be deducted from taxable profits. but after discounting using WACC and arriving at MV of firm, we will deduct the MV of debt, to reach to MV of equity and subsequently to MV/share using the just arrive at MV of equity.

    Is my understanding all correct sir?

    Thank you for your patience.

    February 18, 2021 at 7:00 am #610813
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54718
    • ☆☆☆☆☆

    Your understanding seems to be correct 🙂

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