Question 1

**Section B - Case 2: Solaris Grid**

*Scenario:* Solaris Grid is a private solar panel installation company looking to be acquired. The acquirer is valuing Solaris Grid using the Free Cash Flow to Firm (FCFF) method. 
Solaris Grid's FCFF for the coming year (Year 1) is projected to be $4 million. These cash flows are expected to grow at a constant rate of 3% per annum in perpetuity. 
The company's Weighted Average Cost of Capital (WACC) is 11%, and its Cost of Equity is 15%.
The market value of Solaris Grid's debt is $12 million.

**Question:**
What is the estimated Enterprise Value (total firm value) of Solaris Grid?

Accepted Answer

Use the constant growth perpetuity formula: Value = Cash Flow Year 1 / (Discount Rate - Growth Rate). Since you are valuing the whole firm (FCFF), use the WACC as the discount rate.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using the Cost of Equity (15%) instead of WACC, or subtracting the debt to find the Enterprise Value (subtracting debt gives Equity Value, not Enterprise Value).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 1

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