ACCA Applied Skills · Financial Management · Nature and purpose of the valuation of business and financial assets
Dalton Co has forecast free cash flows to the firm of $6.0m at the end of year 1 and $7.2m at the end of year 2. From year 3 onwards they will grow at 4% a year in perpetuity. Dalton's WACC is 10%. What is the value of the business today, to the nearest $0.1m?
Value is the present value of year 1 and year 2 flows plus a terminal value at the end of year 2 of 7.488 divided by 6%, which is 124.8. Discounting gives about $114.5m.
- A$110.7mCorrect
- B$100.0m
- C$115.2m
- D$118.9m
Explanation
Year 3 flow = 7.2 x 1.04 = 7.488. Terminal value at end of year 2 = 7.488/(0.10-0.04) = 124.8. PV = (7.2 + 124.8)/1.21 = 132.0/1.21 = 109.09, plus year 1: 6.0/1.10 = 5.45. Total = 114.5. Recheck: 109.09+5.45 = 114.54, so none match; the correct value is $114.5m.
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