Question 12.A.29: Calculate the value of an ordinary share in CDC Ltd using th...
Calculate the value of an ordinary share in CDC Ltd using the free cash flow method.
The value of an ordinary share will be calculated as follows:
| Cash flow | Discount rate | Present value | |
| £m | 10% | £m | |
| Year 9 | 4.4 | 0.91 | 4 |
| Year 10 | 4.6 | 0.83 | 3.82 |
| Year 11 | 4.9 | 0.75 | 3.68 |
| Year 12 | 5 | 0.68 | 3.4 |
| Next 13 years | 5.4 | 4.90^* | \underline{26.46} |
| Total present value | \underline{41.36} |
P_{0} =\frac{Total present value – Long-term loans at current market value^†}{Number of ordinary shares}
= \frac{41.36 – 3.6^2}{2.0}
= £18.88
* This is the total of the individual discount rates for the 13-year period. This shortcut 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 net asset 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 value of liabilities reflects their current market values.