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Hello sir,
My doubts regarding the questions are as follows:1. There’s no information given about how the operating profit grows. The answer suggests 6%, same as revenue rate of growth. However, without the answer (since no info is given), i’d have taken the average of the previous years operating profit w.r.t revenue, and given a note. Am I on wrong lines?
2. I did not understand the terminal value calculation. To grow the FCF for the 5th year onward, I’ve taken the FCF of year 4, grown it by 3% (as mentioned) and calculated the perpetuity factor as [ 1/(Ke-g) x DF(4th year) ]. Is this correct?
1 That would be fine – just state what you have assumed and you will get the marks
2 Almost correct 🙂
You are correct to use the growth model formula and then discount for 4 years. But instead of Do(1 + g) in the formula you should have used the FCF of the fourth year x 1.03
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