Question

McCaffrey's value of operations = $2,675,000

Required:

Discuss the implications of the above amount for the business or potential business transaction.

Answer 1

The Present Value (PV) of the Assets-in-Place’s Expected Future Free Cash Flow, discounted at Weighted Average Cost of Capital is the Value of Operation

McCaffery’s Value of Operation is $2,675,000

Since No Other Data is Provided We can Represent the General Implications of “VOP”

1. Weather Assets-in- Place are appropriate: We can compare the Assets-in- Place with the VOP to check whether we are in Surplus or not. As the Asset Depreciates , are we able to recover that amount through our Operations.

2. Calculate Future FREE CASH FLOWS from Operations: By Derivations of the formula and adjusting it to the Requirements we can Caclulate Future Cash flows From Operations , Which can further Help in Cash Budgeting.

3. Calculation of Total Corporate Value: The VOP can be used to calculate Total Corporate Value. and if we have the date about the Preference Stock and Debt. We can Obtain Value of Equity.

Total Corporate Value = VOP + Non Operation Assets

Value OF Equity = Total Corporate Value- Debt- Pref Stock.

4. Increase Market Value OF the Firm: The VOP is a Factor to Total Corporate Value of the Firm which when reduced by Book Value of The Firm gives Market Value of the Firm. In the Value Based Management System. The Objective is to Increase the Firms Value. Therefore if VOP is Increased the Market Value of the Firm will Increase.