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Discuss the concepts of permanent income

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Question - Financial Management - Primark Corporation (PC here after) operates in retailing industry, a summary of its financial information on 31st Dec 2020 is in the following:

Net cash flow from operating activities after tax is €3,340 million

Cash outflows for the acquisition of a subsidiary is €2, 120 million

Cash inflows for disposal of a subsidiary is € 880

Purchase of plant, property and machinery is € l,OOO

Investment into financial assets is €500

ING Netherland Securities analysts predict that PC's free cash flows to equity will increase by 1.5% in 2021 and the growth rate after 2021 is 0.8%. Assuming that there is no other tax.

PC's beta is 1.12. The US Treasury bond rate was 2.25%, and the risk premium is 5%. The total number of shares outstanding is 1000 million.

Required -

(a) Estimate the value per share on 31st Dec 2020, using the discount free cash flows to equity model.

(b) Discuss the concepts of permanent income and economic income. Critically assess their implications for forecasting and equity valuation.

Reference no: EM132972203

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