Halfway online, an internet service provider has 1 million existing subscriber. Each subscriber is expected to remain for 3 years. Halfway expects to generate Rs.100 net after-tax cash flow (subscripttion revenue minus costs of providing service) per subscriber each year. Halfway has a cost of capital of 15%. Furthermore, assume that Halfway expects to add 100000 subscribers each year for the next 10 years and that the value added by each subscriber will grow from the current level at the inflation rate of 3% every year. The cost of adding a new subscriber is Rs.100 currently, assumed to be growing at the inflation rate. Based on the information given, find out the value of the firm and the value per existing subscriber.
Solution.
- Value per subscriber=100*(1-(1.15)3/0.15)
=100*2.2832=Rs.228.32
Value of existing subscriber base= 1million*Rs.228.32
Rs.228.32 million
Query. What formula used for calculating the value per subscriber?
CAclubindia
