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Hi John,
In part a’s answer there is a sentence that says “overall the benefits from growth in excess of the risk-free rate … have led to an increase in the value of the combined company…”
I want to understand how the excess of the risk free rate (Beta * Market risk premium) can be likened to growth and lead to an increase in the value of the combined company.Thanks!
The examiner is not referring to beta * market risk premium.
He is referring to the fact that future growth will be 5% and then 2.25% and that this is higher than the risk free 2%. In fact it is not that it is more than 2% that is really relevant – it is just that the extra value results from a combination of the expected growth and the synergy benefits.
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