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A company with loan notes of 100m that are trading at a 10% premium, anticipates generating annual revenue of $210m with costs of $160m (which includes accounting depreciation of $40m). The annual investment required to sustain operations is $50m which generates an annual tax saving at the tax rate of 30%. The company has a cost of capital of 10%.
What is the value of the company on a discounted cash flow basis?
Answer is $170m
Annual post tax CF = $210 – ($160 – $40) x 70% = $63m
Net Cash Flow = $63m – $50m + $15m = $28m
PV perpetuity = $280m – $110m (loan notes) = $170mHi Sir, could please help me understand this question? Thank you
This is a Paper AFM question and not a Paper FM question. Where did you find it?
The answer is not correct anyway because the 170m is the value of the equity and not the value of the company. Also, the calculation of the current annual cash flows is not correct.
Company valuations as relevant for Paper FM are covered in our free lectures.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
A friend of mine asked me to solve it. And i could not!
Thanks a lot Sir for clarifying that it is an AFM question 🙂
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