Question 1 – Part B
i)
FCF Discount Growth PV PV of FCF
Year
(million) rate rate (million) (million)
2021 1 10% n/a 0,909
2022 1,1 10% n/a 0,909
2023 1,2 10% n/a 0,901
2024 1,5 10% n/a 1,024
2025 1,55 10% n/a 0,962 17,3131
2026 1,597 10% 3% 0,901
2027 1,644 10% 3% 0,843
2028 1,6937 10% 3% 0,7901
2028+ 21.594 10% 2% 10,074
We have the equation for the Market Value of Equity:
And EV equals to the Present Value of FCF:
Thus, we have the value of Simpkin’s shares;
ii)
Project A analysis:
Based on the calculation, investing in project A would add 0.482 million to the EV
Project B analysis:
We have the PV of the initial cost:
We have the PV of the perpetuity starting in 2022 (year 2):
Adding them up, we have the NPV of Project B:
Based on the calculation, investing in project B would add 2.091 million to the EV
Project C analysis
We have the PV of the initial cost:
We have the PV of the perpetuity in 2024:
Discounting it back to 2021, we have:
Adding the initial cost, we have the NPV of project C:
Based on the calculation, investing in project C would add 2.689 million to the EV
Stock price calculation
We have the formula for the Adjusted Equity Value:
Project A:
Project B:
Project C:
After comparing the 3 projects, we would choose Project C as it has the highest NPV ($2.689 million) and
results in the highest stock price ($1.187)
