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

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 99
Topic #: 4
[All CIMAPRA19-F03-1 Questions]

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?

Show Suggested Answer Hide Answer
Suggested Answer: C, D, E

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

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Viola
22 days 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
23 days ago
Hey, at least they didn't forget to deduct taxes, right? That would have been a real blunder.
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Oliva
4 days 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
26 days 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
2 days ago
Calculating the value of the total entity instead of just the equity does seem like a weakness.
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Louis
7 days ago
I think they should have considered future growth beyond year 3 for a more accurate valuation.
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Kate
8 days ago
Agreed, using the cost of equity for discounting seems risky.
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Ivory
2 months ago
I believe another weakness is that they didn't include a perpetuity factor in the calculations.
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Rosalyn
2 months ago
I agree with you, Anna. That would definitely affect the valuation.
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Sue
2 months ago
Hold up, the directors forgot to include a perpetuity factor? Seriously, that's a rookie mistake.
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Lyndia
22 days ago
Glory: Definitely, they need to reevaluate their valuation approach.
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Delmy
1 months ago
And discounting free cash flows at the cost of equity would have been more accurate.
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Glory
1 months ago
They should have considered future growth beyond year 3 as well.
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Micaela
1 months ago
I know right, that's a big oversight.
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Anna
2 months ago
I think the weakness is that they should discount at the cost of equity, not WACC.
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Dolores
2 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
2 months ago
I agree, the approach used calculates the value of the total entity, not the value of equity.
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Una
2 months ago
I think the correct answer is D. The valuation is for the total entity, not just the equity.
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