Buit plc is trying to estimate its value under the current strategy. The managerial team have forecast the following profits for the next five years:

Depreciation of fixed capital items in each of the first two years is £2m. In each of the following three years it is £3m. This has been deducted before arriving at the profit figures shown above. In years 1, 2 and 3 capital expenditure will be £5m per year which both replaces worn-out assets and pays for fresh investment to grow the business. In the fourth and fifth year capital expenditure will be £3m.

The planning horizon is four years. Additional working capital will be needed in each of the next four years. This will be £lm in year 1, £1.2m in year 2, £1.5m in year 3 and £1.8m in year 4.

The company is partially financed by debt – it owes £20m – and partially by equity capital. The required rate of return (WACC) is 10 per cent.

The forecast profit figures include a deduction for interest of £1.2m per year, but do not include a deduction for tax, which is levied at 30 per cent of forecasted profits, payable in the year profits are made.

The company also owns a number of empty factories that are not required for business operations. The current market value of these is £16m.

Required

a. Calculate the future cash flows for the company to an infinite horizon – assume year 5 cash flows apply to each year thereafter. Discount the cash flows and calculate the present value of all the cash flows.

b. Calculate corporate value and shareholder value.