Question 1 - Part c (i)

In this lesson

1. 0:00 Report structure and acquisition overview
2. 2:25 Building the valuation spreadsheet
3. 3:19 Calculating Kowa sales and profit forecasts
4. 5:13 Accounting for tax and capital investment
5. 7:17 Computing free cash flows years one to four
6. 8:20 Calculating weighted average cost of capital
7. 12:05 Discounting cash flows using NPV formula
8. 13:21 Valuing the growing perpetuity from year five
9. 15:18 Deriving equity value and per-share price
10. 18:03 Analysing share price gain from valuation

About this lesson

You'll learn how to construct a professional report to the directors, calculate free cash flows, determine the weighted average cost of capital (WACC), and ultimately value a single share using business valuation techniques. The core calculation involves building a free cash flow model using the given financial data. You'll project sales revenue with a 6% annual growth rate, calculate profit margins at 21%, account for tax at 20%, and factor in additional capital investment as a percentage of sales increases. The key is to work through years 1–4 individually, then handle year 5 and beyond as a growing perpetuity at 2.5% annual growth. This requires careful spreadsheet setup to avoid mixing sales figures with profit calculations. To discount these cash flows, you'll need to calculate WACC using the capital structure data provided. This involves finding the cost of equity, post-tax cost of debt, and their respective market values, then weighting them appropriately. Once you have your discount rate, you'll use the NPV formula for years 1–4, then apply the growing perpetuity discount factor (1 ÷ (r − g)) for year 5 onwards, discounting that perpetuity back four years to present value. Finally, you'll determine the equity value as 75% of the total company value, then divide by the number of shares to arrive at the value per share. The transcript walks through each step methodically, showing how to structure your spreadsheet, avoid common pitfalls with growing perpetuities, and calculate the percentage increase in share value—all essential for AFM and SBL exam success.

Duration: 20m