Income Approach Illustration 1 Discounted Cash Flow Method Year Net cash flow to equity (RM000) 1 2,500 2 3,000

0 3 4,000 4 4,000 5 3,500

The net cash flow attributable to equity thereafter are expected to remain constant at RM3,500,000 per year. XYZ Sdn Bhds cost of capital is 15% and this rate reflects the companys required rate of return for assessing the future cash flows. Solution Year 1 2 3 4 5 Net Cash Flow To Equity 2,500 3,000 4,000 4,000 3,500 Discount Factor @15% 0.870 0.756 0.658 0.572 0.497 Present Value RM000 2,175 2,268 2,632 2,288 1,740 11,103 8,640* 19,743

6 to perpetuity Present value of future cash flow * Formula:

PV of NCF to perpetuity = NCF/Discount factor = (RM3,000,000/0.15) x 0.432 = RM8,640,000 Thus, total value of the firm, XYZ Sdn. Bhd. is RM19,743,000 and the value per share is RM1.97/share (RM19,743,000/10,000,000 ordinary shares).

Asset Based Approach Illustration 2 Net Tangible Asset Method Assume that the book values of the tangible assets and liabilities of XYZ Sdn Bhd are RM25,000,000 and RM2,000,000 respectively. Included in Property, Plant and Equipment are freehold land at cost RM10,000,000 and Machinery at NBV of RM2,000,000. The fair values of freehold land and machinery are RM15,200,000 and RM1,800,000, respectively. ABC Sdn Bhd has in issue 1,000,000 preference shares of RM5 each and 10,000,000 ordinary shares of RM1 each. Compute the value per share of ABC Sdn Bhd. Solution: Book value of tangible assets only Adjustment to fair value: Freehold land (RM15,200,000 - RM10,000,000) Machinery (RM2,000,000 - RM1,800,000) Total fair value of tangible assets Less: Fair value of liabilities (RM2,000,000) including preference shares (RM5,000,000) treated as liabilities Fair value of Net Tangible Assets attributable to ordinary shares Since, the number of Ordinary Shares outstanding were 10,000,000, therefore, the value per share = RM23,000,000/10,000,000 = RM2.30 RM000 25,000 5,200 (200) 30,000 (7,000) 23,000