Page 247 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Business valuation

Solution

The answer is (B).

Year GBP DF @ 12% PV
1 120,000 0.893 107,160
2 100,000 0.797 79,700
3 140,000 0.712 99,680
4 50,000 0.636 31,800
5 130,000 0.567 73,710
–––––––
NPV 392,050
–––––––

However, this ignores cash flows after year 5. Assuming the year 5 cash flow
continues to infinity, this has a present value of:

130,000/0.12 = GBP 1,083,333

This has a present value today of:

GBP 1,083,333 × 0.567 = GBP 614,250

This gives a total present value (value of equity) of:

614,250 + 392,050 = GBP 1,006,300

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