Question 12.A.20: Calculate the value of an ordinary share in CDC Ltd, using t...
Calculate the value of an ordinary share in CDC Ltd, using the free cash flow method.
The value of an ordinary share will be:
| Present value
£m |
Discount rate
10% |
Cash flow
£m |
|
| 4.00 | 0.91 | 4.4 | Year 9 |
| 3.82 | 0.83 | 4.6 | Year 10 |
| 3.68 | 0.75 | 4.9 | Year 11 |
| 3.40 | 0.68 | 5.0 | Year 12 |
| \underline{26.46} | 4.90* | 5.4 | Next 13 years |
| \underline{41.36} |
P_{0} =\frac{PV − Long-term loans at current market value†}{Number of ordinary shares}
=\frac{41.36 − 3.6‡}{2.0}=£18.88
* This is the total of the individual discount rates for the 13-year period. This short cut can be adopted where cash flows are constant. For the sake of simplicity, it is assumed that there are no cash flows after the 13-year period.
† This method, unlike the statement of financial position methods discussed earlier, does not deduct short-term liabilities in arriving at a value per share. This is because they are dealt with in the calculation of free cash flows.
‡ We are told in the example that the statement of financial position values of liabilities reflect their current market values.