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PURSUIT CO (JUN 11 ADAPTED)
1. question have used 3 years to get the annual growth rate. However, is it possible if i use the lasts year figures to estimate the annual growth rate ?
[(16146/15229)-1] x 100% = 6%
Since it is still the same answer as per shown in the revision kit, is it possible to use the last year figures if any similar questions come out in the exam ?2. if i use the formula shown in the answer sheet to figure out the annual growth rate for sales revenue,
[(16146/13559) x (1/3) -1 ] x 100% = 60.3 % im not sure how the revision kit got the 6%…
3. if i’m not wrong, when we discount the cashflow, we have used the WACC. However, since the question did not provide us information about the cost of debt and market value of debt, we just proceed to calculate discount factor using cost of equity only if that is the only information available ?
4. next time if the question ask us to calculate the growth rate for both operating profit and sales revenue, do we have to use the average rate ? or is it allowed to use the last year’s figure for future cash flow estimation ???
1 and 4: For annual growth rates you do not simply look at the growth rate in the previous year – you must calculate the average growth rate over all the years available. (Just as explained in my free lectures)
2. the formula is not 16146/13559 x 1/3. It is (16146/13559)^(1/3)
You should know from school that writing something as to the power (1/3) is the same as taking the third root.3. The question does give information about the cost of debt (the last sentence of the paragraph below the income statement extracts) and it does give information about the market value of debt (the paragraph immediately above the income statement extracts).
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