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Chapter 10
Example 1
UUU Co is a financial services company based in the USA.
It reported a profit before tax in the most recent financial year of
USD 28.5 million, and the value of its tangible assets is USD 210 million.
The average return on tangible assets for firms in the financial services
industry is 9%. The tax rate is 25% and UUU Co's cost of capital is 14%.
What is the value of UUU Co using the CIV approach?
A USD 51.4 million
B USD 217.2 million
C USD 238.5 million
D USD 261.4 million
Solution
The answer is (D).
USD m
Current pre-tax profit 28.5
Less: Industry ROA × Tangible assets (9% × 210m) (18.9)
––––
Excess annual return (pre-tax) 9.6
––––
Post-tax excess annual return = 9.6m × (1–0.25) = USD 7.2m
CIV (assuming constant perpetuity) = 7.2m × 1/0.14 = USD 51.4m
Therefore, the total value of UUU Co is estimated to be
210m + 51.4m = USD 261.4m
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