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Dear Sir,
For Cigno Co, they valued the cash flows of Antara Co using the combined company’s wacc. I found this strange as how are they discounting using combined companies WACC when the cash flows are only for Antara Co.In my answer that I drafted, I took the kd as the interest ÷ Book value of debt, and then discounted the cash flows with Antara’s WACC.
My answer matches with rest of the answer in the suggested solution.
However, I do realize that interest ÷ debt may not give the correct Kd, as it would be possible interest may involve interest paid on current liabilities (such as bank overdraft). However, I would have mentioned this in my assumptionsIs my answer wrong? because i think its wrong to discount using WACC of combined company when the cash flows are only of Antara
It is because the question specifically says that the cost of capital is to be based on the equity beta and the cost of debt of the combined company.
As far as the cost of debt is concerned, the question gives the pre-tax cost of debt as being 6.0%, and therefore the cost of debt to the company is 6% x 0.78.
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