Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Opao Co, Dec 2018
- This topic has 7 replies, 2 voices, and was last updated 1 year ago by John Moffat.
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- July 27, 2023 at 8:13 am #688995
I had a question regarding the free cash flow to firm for Tai Co.
We get the profit after tax pre acquisition and then get the terminal value. My question is why are we not discounting the terminal value to present value and considering the terminal value to be the Market Value of the business?Thank you!
July 27, 2023 at 8:42 am #688998I don’t understand you. Where are we calculating the terminal value??
July 27, 2023 at 4:36 pm #689025We are calculating the MV of Tai Co pre acquisition where we get the free cash flows of $1399.51 (after taking into account the growth of 3% for the forseeable future. Why are we not discounting this to the present value using the cost of capital?
I had another question, in the answer when they discuss which offer is to be taken they mention about 12%:
Opao Co’s shareholders benefit less from the acquisition compared to Tai Co’s shareholders. In each case, they get less than
the additional value created of 12%, with the cash payment offering the highest return of 11·2%, which is just below the 12%
overall return.How are they getting the 12%?
July 27, 2023 at 5:36 pm #689034$1,399.51 is the present value. When we calculate the PV of an inflating perpetuity (as is the case here) we use the dividend growth formula as I explain in my free lectures. Using this formula gives the present value.
Prior to the acquisition the total value of the two companies is 5,000 + 1,000 = 6,000.
After the acquisition, the total value of the combined company is 6,720.
So the overall return is 720/6,000 = 12%
July 29, 2023 at 7:06 am #689079Thank you so much!
One question, when we use the multi growth model, growth is different for first few years but same for 5 years an onward, why do we then discount it to present value?
July 29, 2023 at 9:01 am #689086We need the present value of all future flows, whether they are growing at the same rate or at different rates in the future.
July 29, 2023 at 12:05 pm #689092Thank you!
July 29, 2023 at 3:08 pm #689100You are welcome.
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