CAF-7 · Chapter 9 · Question 2 of 15
The WACC of a company is 12%, and 50% of its shares are held by the directors. Ignoring taxation, if annual cash profits of the company in perpetuity are Rs. 240 million, what would be the theoretical total market value of the company?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Rs. 2 billion
Explanation
The market value of an all-equity/constant profit firm can be calculated by capitalizing its earnings: Market Value = Annual Cash Profits / WACC. Rs. 240 million / 0.12 = Rs. 2,000 million (which is Rs. 2 billion).
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