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Sir you may have read the recent paper of March/june sample 2019. In this paper there is a business valuation question by the name of Newimber company and I was getting a bit confused on the part of Cash flows of poyins Co. from year 4 onwards.
I wanna ask you that why there is saperate calculation for cash flow after tax and investment of additional assets, instead one calculation for net amount, in the solution given by the examiner. Is it due to the fact that C.F are increasing through a percentage like in fourth year the growth percentage was 2% and there was just an amount $25m for investment in additional asset and no percentage growth was mentioned for it?
Yes – that is the reason.
The after tax cash flows are an inflating perpetuity and therefore we use the dividend growth formula to discount.
The investment in addition assets is a constant perpetuity and so we simply use 1/r as the discount factor as normal.
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