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ACCA Strategic Professional · Advanced Financial Management · Valuation and the use of free cash flows

Falconer plc has FCFF of $8.0 million next year, growing at 5% a year. WACC is 11%. Which statement about the effect of the terminal growth assumption is correct?

Enterprise value is $133.3 million at 5% growth and rises to $160 million at 6% growth, because the denominator falls from 6% to 5%.

  1. AEnterprise value is $133.3 million; raising growth to 6% raises it to $160.0 million
  2. BEnterprise value is $160.0 million; raising growth to 6% raises it to $200.0 millionCorrect
  3. CEnterprise value is $72.7 million; growth does not affect it
  4. DEnterprise value is $160.0 million; raising growth to 6% lowers it because of higher reinvestment

Explanation

At 5% growth: 8/(0.11-0.05) = 133.3. At 6%: 8/0.05 = 160. So the first option's figures are right but pair as 133.3 and 160.0; option 1 states them correctly. Option 2 is wrong.

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