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

Zenith plc expects free cash flow to firm (FCFF) of $12.0 million next year, growing at 3% a year in perpetuity. Its WACC is 9%. It has debt with a market value of $40 million and cash of $5 million. What is the value of equity using the perpetuity growth model?

Equity value is $165 million. Enterprise value is FCFF of $12m divided by (9% minus 3%), which is $200m. Deduct the $40m debt and add the $5m cash to reach the value attributable to shareholders.

  1. A$165.0 millionCorrect
  2. B$200.0 million
  3. C$160.0 million
  4. D$205.0 million

Explanation

Enterprise value = 12.0 / (0.09 - 0.03) = $200 million. Equity = 200 - debt 40 + cash 5 = $165 million. Ignoring the cash gives $160 million. Adding debt instead of deducting gives $245m, and failing to deduct debt gives $200m or $205m.

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