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Company BBB has prepared a valuation of a competitor company, Company BBD.

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Company BBB has prepared a valuation of a competitor company, Company BBD. Company BBB is intending to acquire a controlling interest in the equity of Company BBD and therefore wants to value only the equity of Company BBD.

The directors of Company BBB have prepared the following valuation of Company BBD:

Value of Equity = 4.63 + 5.14 + 5.56 = S15.33 million

Additional information on Company BBD:

Which THREE of the following are weaknesses of the above valuation?

A.

Free cash flows to all investors should be discounted at the cost of equity of 10% rather than WACC of 8%.

B.

The valuation is understated as forecast future growth has been ignored beyond year 3.

C.

The valuation is understated as the directors have failed to include a perpetuity factor in the calculations.

D.

The approach used calculates the value of the total entity not the value of equity.

E.

The valuation is overstated as the directors have failed to deduct tax from the free cash flows.

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