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Subject F3: Financial Strategy
44 Execute Co is a geared company, with 1 million $0.50 par value shares in issue,
and $500,000 of bonds in issue, trading at $80 per $100.
It has a cost of equity of 14% and a WACC of 10%.
The company generated free cash flow to equity of $1.5 million in the most
recent year and the directors expect this figure to grow by 4% per annum in the
future.
What is the estimated value of an Execute Co share?
A $7.80
B $12.80
C $15.60
D $25.60
45 Which THREE of the following are weaknesses of the P/E method of
valuation?
A It is difficult to identify a suitable P/E ratio, particularly when valuing the
shares of an unlisted entity.
B The calculations are based on accounting profits rather than cash flows.
C It is difficult to establish the relevant level of sustainable earnings.
D It involves a more complex calculation than most other valuation methods.
E The calculations require an estimate to be made of the cost of capital,
which can be very difficult to ascertain.
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