ACCA Strategic Professional · Advanced Financial Management · Valuation and the use of free cash flows
Brenner Ltd expects free cash flow to the firm (FCFF) of $10m next year, growing at 4% a year in perpetuity. WACC is 9%. Net debt is $40m. What is the value of equity under the free cash flow valuation approach?
Equity value is $160m. Enterprise value is next year's FCFF of $10m divided by WACC minus growth (9% less 4%), giving $200m. Deducting net debt of $40m leaves the value attributable to shareholders.
- A$160.0mCorrect
- B$168.0m
- C$200.0m
- D$210.0m
Explanation
Enterprise value = 10 / (0.09 - 0.04) = $200m. Less net debt $40m gives equity of $160m. $200m ignores debt. $210m wrongly adds debt, and $168m arises from using the wrong base.
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