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in calculating market value of equity,are we supposed to multiply number of shares and share price and after by 1/2 because according to the question equity should be split evenly?should this apply to gearing part also?
With regard to splitting the equity, it does say at the end of the question that for gearing estimates is should be assumed to be 55% / 45%.
With regard to the debt, the question does say which debt goes with which division.
Got it.thanks.will you advise romage to seperately float the two division given their 15 yr PV and infinity one?(manufacturing infinity pv is 363.96,15yrs 268.83 while property sale division infinity pv is 365.66 and 15 yrs 239.57.And also i’d like to understand limitations of the calculation
You are not asked to advise, and you cannot – there are advantages of both!
With regard to limitations, the biggest one is of course the fact that all the flows that have been used are only estimates!
Capital allowances (or tax allowable depreciation) reduces the taxable profits and therefore save tax.
For a full explanation of how to deal with it you should watch the free lecture (maybe better to watch the Paper F9 lecture on investment appraisal with tax and inflation).
thanks.il check.and is it advantageous for romage to demerge given the pv values?
It does not appear so – read the conclusion at the end of the examiners answer 🙂
i did.just wanted to understand the comparison between market value of equity and the pv of cash flow
Don’t forget that it is the shareholders who matter (with regard to the decision).
The PV of the cash flows will give the value of the firm (including any debt). Without debt then it does give the value of the equity.
ok.i get it the logic behind the calculation.and how do you get the value of debt(125.5)
The workings are in the examiners answer!
The market value of the term loan is 60M. The market value of the loan stock is 50 x 131/100 = 65.5M.
Total is 125.5M
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