Describe how free cash flow should be estimated

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Reference no: EM132199769

Question -

a) Overall company value normally is estimated using the Free Cash Flow approach. Describe how Free Cash Flow should be estimated. Indicate which items should and should not be included. You should include a discussion on the treatment of tax. Identify any implicit assumptions, and also consider if there are potential shortcomings.

b) Identify all inputs that are required to accurately estimate Weighted Average Cost of Capital, and indicate the best data sources.

c) You are required to advise on a proposed investment of 875,000, which will generate annual cash inflows of 81,650, in perpetuity. If equity finance alone is assumed, cost of capital is 10%. It will however be possible to partly finance with €450,000 debt, at an annual cost of 7%. This debt is fixed. The company tax rate is 20%. Adjusted Present Value should be used when evaluating this proposal. In conclusion, you should determine if your recommendation would be affected, as the future debt level might increase or decrease, as actual performance varies. Explain your conclusions.

Reference no: EM132199769

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