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John,
This question involved an acquisition where the acquirer was going to acquire a target for share exchange + cash which represents a 30% premium.
The question asked to calculate the additional equity value created by combining the 2 company’s.
My question is when working out the combined value of the company why is the cash payment by the acquirer not included in the cash flow table? I thought this would be included at time 0? Cash payment is 624mMany thanks for your on going help
Let me try and explain in two ways 🙂
Most importantly, we are valuing the film based on the future expected free cash flows. Obviously paying out cash now might affect the future cash flows (even if only because there is less cash to earn interest) but we assume any effect like this has been taken account of in the information we are given.
The other way of looking at it is that although the assets of the acquirer are indeed reduced because of the cash paid out, at the same time the assets of the acquirer are increased because of the investment they have in the company being acquired.
I hope one or both of the above make sense for you 🙂
Thanks John, it makes sense now. I guess another way to think of it is that when the acquisition involves borrowing you deduct the borrowing so it’s safe to assume that you don’t deduct the cash payment when there is no borrowing
Thanks
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