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

Zeta Co forecasts free cash flows to the firm of $12 million in year 1, growing at 3% a year in perpetuity. Its WACC is 9%. Zeta has debt with a market value of $40 million and surplus cash of $5 million. What is the estimated value of equity?

Equity value is $165 million. Enterprise value is 12 divided by (9% less 3%), which is $200 million. Deducting debt of $40 million and adding surplus cash of $5 million gives $165 million.

  1. A$165 millionCorrect
  2. B$205 million
  3. C$160 million
  4. D$200 million

Explanation

Enterprise value = 12 / (0.09 - 0.03) = $200 million. Equity = 200 - 40 + 5 = $165 million. Check: 165 + 40 - 5 = 200. $200 million ignores debt and cash, while $160 million deducts the cash instead of adding it.

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