CIMA Exam CIMAPRA19-F03-1 Topic 4 Question 99 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 99
Topic #: 4

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?

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

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

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

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

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

Show Suggested Answer

Suggested Answer: C, D, E

by Mabel at Sep 16, 2024, 06:01 PM

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Viola

5 months ago

You know, if they had just asked me, I could have done this valuation in my sleep. Probably would have gotten it right the first time.

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Ronnie

5 months ago

Hey, at least they didn't forget to deduct taxes, right? That would have been a real blunder.

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Val

4 months ago

Yeah, that would have been a major mistake. Taxes are an important factor in valuation.

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Franchesca

4 months ago

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

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Winfred

4 months ago

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

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Oliva

4 months ago

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

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Rossana

5 months ago

Discounting at the cost of equity instead of WACC? That's a bit of a stretch, don't you think?

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Galen

4 months ago

Calculating the value of the total entity instead of just the equity does seem like a weakness.

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Louis

5 months ago

I think they should have considered future growth beyond year 3 for a more accurate valuation.

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Kate

5 months ago

Agreed, using the cost of equity for discounting seems risky.

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Ivory

6 months ago

I believe another weakness is that they didn't include a perpetuity factor in the calculations.

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Rosalyn

6 months ago

I agree with you, Anna. That would definitely affect the valuation.

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Sue

6 months ago

Hold up, the directors forgot to include a perpetuity factor? Seriously, that's a rookie mistake.

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Lyndia

5 months ago

Glory: Definitely, they need to reevaluate their valuation approach.

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Delmy

5 months ago

And discounting free cash flows at the cost of equity would have been more accurate.

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Glory

6 months ago

They should have considered future growth beyond year 3 as well.

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Micaela

6 months ago

I know right, that's a big oversight.

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Anna

6 months ago

I think the weakness is that they should discount at the cost of equity, not WACC.

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Dolores

6 months ago

I think the correct answer is D. The valuation is for the total entity, not just the equity.

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Verlene

6 months ago

I agree, the approach used calculates the value of the total entity, not the value of equity.

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Una

6 months ago

I think the correct answer is D. The valuation is for the total entity, not just the equity.

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