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sir, westparley was a difficult question because they asked for total value which Westparley Co’s shareholders will gain from the acquisition of Matravers Co.
it also said Although for the purposes of the calculation it has been assumed that the overall mix of debt and equity will remain the same, it has been assumed that the overall mix of debt and equity will remain the same. Firstly, you use this factor in calculating the new wacc. However, to find the total value for west parleys shareholders, we don’t use this factor at all. see the answer below:
Value attributable to Westparley Co shareholders = present value of cash flows + proceeds from sell-off + value of synergies – value to Matravers Co’s investors
= $15,872m + $5,058m + $1,842m – $20,875m = $1,897mSo my questions are:
has this question about total value ever been asked before because I have certainly not seen it?
If we take the equity value of the present value of cash flows and take away the previous equity values of both companies (the target and acquirer) .6*(15872+5058) – 12500- 34000= we get a negative answer even if we ignore the premium we pay to matravers.
I know the question is not asking for this, but this acquisition provides no equity value to the west parley shareholders? my question is, why would they want to do this acquisition if it provides no equity value? is it just debt value that they are gaining?thanks for your help and teaching.
Yes – this sort of question has been asked before and is actually quite common. You should find other similar questions in your Revision Kit.
The figures you have quoted are the extra value coming from the acquisition of Matravers (extra to the value of Westparley) that already exists. The $1,897m is net extra benefit of acquiring Maltravers after paying Maltravers shareholders. This is the amount by which the existing wealth of Westparleys shareholders will increase.
hi thanks for your response.
I have seen questions where it asks what is the maximum premium the acquiring company would pay for the target company and in this case the extra premium ontop of the premium they are already paying is 1897.
Another questions asks whether the acquisition is worthwhile to the shareholders and in this case, since it is a positive value (+1897), the acquisition is worthwhile. However, i have not seen it phrased as total value to the shareholders. Please Correct me if I am wrong.
If you know off the top of your head another question, please let me know. Tutors in the past seem to know all the questions since the material is repeated. Thanks once again for your kind help (you are quick to help us all out).think i made mistakes above. You might be able to see my point with fodder co. pursuit is aquiring fodder and we are asked whether the acquisition would be beneficial. In this case we have found the value of the combined company using free cash flow to firm and taken away the market value of debt and equity ie the firm value for both fodder and pursuit to calculate the synergy benefits. we also pay a premium to fodder for acquiring it and we get a net benefit to pursuits shareholders. So my question is, this is the net benefit. why do we not take away the market value of debt and equity for westparley? Is it because in westparley they are asking for total value and not the net benefit? am i correct in saying westparley is not beneficial for shareholders?
forgive me for bombarding you but i think i have worked it out. as per the question, Westparley is only using the matravers home stores together with the online sales from its home business to calculate the revenues going forward used in the free cash flow method or pv of cash flows. This means that we are not working out the combined cash flows of the new company since westparley sells food and household items in westparleys stores for which revenues have not been provided to us. Therefore we don’t need to take off the market value of equity and debt of westparley in the calculation. is this correct?
Sir I have a doubt in this qs. I have practised alot of such qs but the calculation of westparley is a little different to what I have seen in other qs.
Usually additional value created is calculated as follow:
combined value of firm /equity – value of individual companies.
then the amount of premium paid to the target is deducted from the additional value.
Remaining value is for the acquirer shareholders .
However in this qs the combined company value using FCFF is lower than westparley market value of equity.
Sir I am a bit confused which method to use when.
I just realised that we didnt calculate combined co value but only martravers home value after acqusition. we basically dont know the combined comapny value.
Am I right Sir.
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