ACCA Strategic Professional · Advanced Financial Management · Valuation for acquisitions and mergers
Vertex Co forecasts FCFF of $50m, $60m and $70m in years 1 to 3. From year 4, FCFF grows at 2% a year in perpetuity. WACC is 10%. What is the enterprise value, to the nearest $0.1m?
Enterprise value is $818.2m. Explicit cash flows have a present value of about $147.6m. The year 3 terminal value of 70 x 1.02 / 0.08 = $892.5m is discounted three years to $670.5m. Adding the two gives the total.
- A$818.2mCorrect
- B$884.8m
- C$805.0m
- D$147.6m
Explanation
Terminal value at year 3 = 70 x 1.02 / 0.08 = 892.5, with a PV of 892.5/1.331 = 670.5. PV of years 1-3 = 45.5 + 49.6 + 52.6 = 147.6. Total = $818.2m. Discounting the terminal value by only two years gives $884.8m, which is wrong because it is a year 3 value.
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