September 2016 MCQ #10

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November 29, 2017 at 10:29 am #418825
aiymgul91
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Good day!

Could you please help me with question #9 of September 2016 MCQ (Section A) about theoretical value of company. I could not get the logic of the answer.

Thanks in advance.
November 29, 2017 at 11:49 am #418857
John Moffat
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The operating cash flow is $2M per year in perpetuity.
The WACC is 8%.

Therefore the value of the company is $2M p.a. in perpetuity discounted at 8%, and the discount factor for a perpetuity is 1/r, which here is 1/0.08.

2M x 1/0.08 = 25M
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