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Hi John,
For the valuation in Burcolene, I have some queries
1. The question says that the market value of equity is incorrect for 2 companies. However, the answer still calculate WACC using that incorrect equity value and then revalue the company again using free cash flow model based on WACC. That does not really make sense to me. Can you help clarify?
2. Enterprise value = equity value + net debt. Then why do we need to subtract share option value and the pension deficit from the calculated enterprise value to have adjusted value? If we are saying that the books of 2 companies are currently not accounting for the option value and the pension deficit, then shouldnt these 2 be considered as additional debt (for unfunded pension and for option cost sit in balance sheet) and be added to enterprise value?Thank you
1. The question does not say the market values are incorrect – it says that they might not fully reflect the values due to rumours. Also there are not other values we could use.
2. Since these are both liabilities that do not appear in the accounts, they reduce the value.
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