Hi Mr Mofat,
In one if the question in bpp kit .. the value of company acquired via free cash flow was as expected .. future cash flows into growth over discount factor - growth .. however .. the answer was further multiplied against 0.909, which i dont understand why and the relevance ..
Following is the extract of the answer
Value of Ndege Co =
Present value of $7.62m free cash flow growing at 20% in the first year and discounted at 10%:
$7.62m × 1.2 × 0.909 = $8.31m
Add: present value of cash flows from year 2 onwards:
($9.14m × 1.052)/(0.1 – 0.052) × 0.909 = $182.11m
Less bond taken over by Ndege = $40m
Value to shareholders of Ndege Co = 8.31 + 182.11 – 40 = $150.42m
And the relevant question extract :
Ndege Co's cost of capital is estimated to be 10%. It is estimated that in the first year of operation Ndege
Co's free cash flows to firm will grow by 20%, and then by 5.2% annually thereafter
why 0.909 in reaching 182.11 please ? thanks
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Question thread for March 2018
8y ago#1It is because the dividend valuation formula (which is what has been used - it works for any inflating perpetuity) assumes that the first flow is in 1 years time. In this case, the first flow is in 2 years time - 1 year later - and so the result needs discounting for 1 year to get back to the present value.
(Please title the threads according to what question you are asking about, and not just 'March 2018' :-) )
Thanks . i got it ..
i was thinking to ask all the questions under this thread . One stop place . or would u prefer an additional post for every question relating to the March attempt i am appearing for?
8y ago#3I am please you have got it :-)
You must start a new thread for new questions.
The reason is that our answers benefit all students - by using the search box on these pages you will find that often questions have already been asked by others, and already answered. We certainly cannot offer free private tuition :-)
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