Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › theoretical value of the company

- This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.

- AuthorPosts
- June 7, 2023 at 3:45 pm #686357
A company has annual after-tax operating cash flows of $2m per year which are expected to continue in perpetuity. The company has a cost of equity of 10%, a before-tax cost of debt of 5% and an after-tax weighted average cost of capital of 8% per year. Corporation tax is 20%.

What is the theoretical value of the company?

Answer :- Theoretical value = 2m/0.08 = $25m

hello sir ,can you please explain what the theoretical value means here and how it is calculated in this situation? is there any formula to calculate it ?

June 7, 2023 at 5:23 pm #686373As I explain in my free lectures, the theoretical value of the company is calculated by discounting the after-tax operating flows at the WACC.

Given that the after-tax flows are $2M per year in perpetuity and that the discount factor for a perpetuity is 1/r (where r in this case is the WACC of 8%), then the value of the company is indeed 2M/0.08.

Have you watched all of my free lectures? They are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.

- AuthorPosts

- You must be logged in to reply to this topic.