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The following information has been taken from the statement of profit or
loss and statement of financial position of B Co:
Revenue $350m
Production expenses $210m
Administrative expenses $24m
Tax allowable depreciation $31m
Capital investment in year $48m
Corporate debt $14m trading at 130%
Corporation tax is 30%.
The WACC is 16.6%. Inflation is 6%.
These cash flows are expected to continue every year for the
foreseeable future.
Required:
Calculate the value of equity.I am not able to understand how to approach this question. For valuing the equity of the company using DCF method, what are the relevant cash flows and what should be the appropriate rate used? Please help me. Thank you!
These cash flows are expected to continue every year for the foreseeable future.
So that means a perpetuity
Need net cash flows
So calculate
Operating profits as $(350m – 210m – 24m) = $116m
Then calculate
Tax on operating profits = $116m x 30% = $34.8
On to
Allowable depreciation = $31m (assumed not included in production or administration expenses)
Tax relief on depreciation = $31m x 30% = $9.3mTherefore calculate net cash flow as 116m – 34.8m + 9.3m – 48m = $42.5
The real discount rate is: 1.166 / 1.06 = 10%
The corporate value is = $42.5m / 10% = $425m
Equity = $425m – $(14m x 1.3) = $406.8m
Net cash flow is a perpetuity so we have used the real cash flow and the real discount rate.
Pv = x/r
Pv = Co value / WACC
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