MENU
Section C (4 Mark)
Watts Industries, a manufacturer of valves for industrial and residential use, had the following projected free cash flows to equity per share for the next five years , in nominal terms.
The terminal price is based upon a stable nominal growth rate of 6% a year after year 5. The discount rate, based upon financial market rates, is 14%, and the expected inflation rate is 3%.
Estimate the value per share, using nominal cash flows and the nominal discount rate.
Suggested Answer: A
Get Premium CWM_LEVEL_2 Questions
as Interactive Web-Based Practice Test or PDF
Real Exam Format
Detailed Explanations
Instant Access
Get Your Practice Test
7 comments · newest first
SH
Shawnda
Wait, how can the discount rate be higher than the growth rate?
RA
Rasheeda
5 days ago
I think Rs 31.14 sounds about right!
FE
Felton
10 days ago
Looks like the terminal growth rate is pretty optimistic at 6%.
BR
Brittni
16 days ago
I’m leaning towards option B, Rs 31.14, but I’m not entirely confident. I need to double-check my calculations for the discounting part.
YU
Yuonne
21 days ago
This question seems similar to one we did in class where we had to estimate share value using cash flows. I think I’ll start with the cash flows for the first five years.
VI
Vincenza
26 days ago
I think we need to discount the cash flows back to present value, but I’m a bit confused about how to handle the nominal terms with inflation.
MA
Marvel
1 month ago
I remember we practiced calculating terminal value before, but I’m not sure how to apply it with the growth rate here.