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I had a problem with one of the question I was working on.in the BPP kit from P4 exam of 1999
We are told in the question:
“Assume a WACC of 10% applies. Britam wants to acquire Vitam on 1.Jan.2005, assume today is 30.Aug.2004, and the forecast data is as follows:
– After tax free cash flow, ignoring synergistic benefits, of $54.6M will arise in 2005, growing by 4% a year in perpetuity
For the purposes of discounting, cash flows should be assumed to arise at the end of the year to which they relate.
Required:
Estimate the value of equity for Vitam in $ as at 1.Jan.2005 by using FCF to firm methodology and ignoring synergistic benefits.I did this:
PV of after tax free cash flow using a rate of 10% is 54.6M * 0.909 = 49.63M
For the perpetuity I did (1/(0.1-0.04)*0.909) = 15.15* 54.6M (1.04) = 860M
Therefore total value of business = 860M + 49.63M = 910M.
Is this correct as per your observations? BPP get an answer of 657M. I don’t understand how and the method they have adopted. Maybe it is a typing error. Thanks.
On the information you have typed, then the correct answer is 910M.
However without seeing the full question, I cannot explain whether they have made a mistake or whether there is something else relevant in the question.(Incidentally, you could have got the 910M a little quicker! It is 54.6/(0.10 – 0.04) = 910
🙂 )Thank you for your tip on time saving. I just realized that we were told to value the equity of the company Vitam so 910 is the value of the firm to get to value of the equity do I reduce the 910 by 25% (as the capital structure of Vitam is 25% debt and 75% equity)?
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