A company generates an annual cash flow of 200 that is no longer growing. Its cost of capital is 10%. Its value by discounting cash flows is therefore 200 / 10% = 2,000. But it turns out that this company is made up of two divisions, one of which generates a cash flow of 100 which grows by 5% per year and the other of 100 which decreases by 5% per year. Since both have the same cost of capital of 10%, the first division is worth 100 / (10% − 5%) = 2,000 and the second 100 / (10%

+ 5%) = 667. Analysed with this method, the company is worth 2,000 +

667 = 2,667.

All things considered, is it worth 2,000 or 2,667?

AppendixLO1