ACCA Strategic Professional · Advanced Financial Management · Valuation and the use of free cash flows
Karta Co expects FCFF of $50m next year, growing at 4% a year indefinitely. Its WACC is 9%. Market value of debt is $300m. What is the value of equity using the FCFF approach?
Equity is worth $700m. Firm value is next year's FCFF of $50m divided by WACC minus growth, 5%, giving $1,000m. Deducting the $300m market value of debt leaves the equity value attributable to shareholders.
- A$700mCorrect
- B$1,000m
- C$1,300m
- D$556m
Explanation
Firm value = 50 / (0.09 - 0.04) = $1,000m. Equity = 1,000 - 300 = $700m. $1,000m forgets to deduct debt; $1,300m adds debt wrongly.
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