A company’s Board of Directors wishes to determine a range of values for its equity.

A company’s Board of Directors wishes to determine a range of values for its equity.

The following information is available:

Estimated net asset values (total asset less total liabilities including borrowings):

• Net book value = $20 million

• Net realisable value = $25 million

• Free cash flows to equity = $3.5 million each year indefinitely, post-tax.

• Cost of equity = 10%

• Weighted Average Cost of Capital = 7%

Advise the Board on reasonable minimum and maximum values for the equity.
A . Minimum value = $25.0 million, and maximum value = $35.0 million
B . Minimum value = $25.0 million, and maximum value = $50.0 million
C . Minimum value = $20.0 million, and maximum value = $35.0 million
D . Minimum value = $20.0 million, and maximum value = $50.0 million

View Answer

Answer: A