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Many questions such as
Chikepe co marjun18
Nente co jun 12
Makonis co dec 13Finds synergy by calculating equity value ie total value less debt value.
In pursuit co, it appears that total value of the firm was used, instead of net asset(equity) to find synergy.
Why is this sir?
It is because the capital structure stays unchanged and therefore any increase in the value of the firm all goes to the shareholders.
Sir in chikepe co also capital structure stays same still they have taken market value of equity only to compute synergy as compared to pursuit where value of firm is taken
Synergy gains only ever go to equity.
Debt does not make gains through synergy and the only reason debt changes is because the company has borrowed more debt (or repaid debt).
The question asks for you to use a free cash flow to the firm methodology and this gives the total value of equity plus debt. Given that the capital structure remains the same the equity is 70% of the value of the firm, and again it is the change in the equity that is due to synergy. (The amount of debt will change by again this is not because of synergy gains.)
Yes sir i understood chikepe but had confusion for pursuit co where computation of synergy is done using market value of company
sir can u help why market value of company is used in pursuit to compute overall synergy
The question asks for the free cash flow to the firm methodology to be used, and this gives the total value of the business (equity plus debt).
The total benefit (i.e. the increase in value) is the difference between the market value of the ‘combined’ company and the total of the individual market values of the two companies.
After subtracting the premium required to pay for Fodder, the rest of the benefit belongs to the shareholders in Pursuit.
Thanks sir for all your guidance and help just need ur best wishes for the exam .Your lectures and guidance was like a blessing for me.Because of your guidance and lectures i passed PM 65 marks and FM 62 marks .Opentuition is really a blessing to all acca students
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