Buit plc is trying to estimate its value under the current strategy. The managerial team have forecast the following profits for the next five years:

Depreciation of fixed capital items in each of the first two years is 2m. In each of the following three years it is 3m.

This has been deducted before arriving at the profit figures shown above. In years 1, 2 and 3 capital expenditure

will be 5m per year which both replaces worn-out assets and pays for fresh investment to grow the business. In the

fourth and fifth year capital expenditure will be 3m.

The planning horizon is four years. Additional working capital will be needed in each of the next four years. This

will be 1m in year 1, 1.2m in year 2, 1.5m in year 3 and 1.8m in year 4.

The company is partially financed by debt it owes 20m and partially by equity capital. The required rate of

return (WACC) is 10 per cent.

The forecast profit figures include a deduction for interest of 1.2m per year, but do not include a deduction for

tax, which is levied at 30 per cent of forecasted profits, payable in the year profits are made.

The company also owns a number of empty factories that are not required for business operations. The current

market value of these is 16m.

a Calculate the future cash flows for the company to an infinite horizon assume year 5 cash flows apply to each

year thereafter. Discount the cash flows and calculate the present value of all the cash flows.

b Calculate corporate value and shareholder value.