Vancouver Investments Ltd has provided you with the following information. Vancouver Investments Ltd’s cash flows expected at the end of each year for the next four years are shown below:

The growth rate of the free cash flows after 2025, to infinity, is expected to be 3%. The market value of Vancouver Investment Ltd’s debt is $905,000 and the market value of its preference shares is $150,000. Vancouver Investment Ltd has issued 500,000 shares and has a weighted average cost of capital of 8%.

a) Determine the value of the entire company using the free cash flow method. Use whole numbers when rounding.

b) Determine the value of a share in Vancouver Investment Ltd.

c) Identify two circumstances where it is appropriate to use the free cash flow method to value shares?
 

Year ended Free cash flow ($) 31 March 2022 220,000 31 March 2023 250,000 31 March 2024 280,000 31 March 2025 300,000