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ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques

Orlin Group expects free cash flows to the firm of $9m next year, growing at 4% a year indefinitely. Its WACC is 10% and it has net debt of $40m. What is the value of equity using the free cash flow valuation approach?

Equity value is $110m. Enterprise value equals next year's free cash flow of $9m divided by WACC less growth, which is 10% minus 4%, giving $150m. Deducting net debt of $40m leaves $110m attributable to shareholders.

  1. A$110mCorrect
  2. B$150m
  3. C$90m
  4. D$100m

Explanation

Enterprise value = 9 / (0.10 - 0.04) = $150m. Equity = 150 - 40 net debt = $110m. $150m forgets to deduct debt, and $90m wrongly uses a growth rate of 0 in the denominator and no growth adjustment.

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