The valuation of mergers and acquisitions (part 3) – ACCA (AFM) lectures
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Dear sir, thanks for the lectures.
Would dividends to preference shareholders be considered at debt payments, and deducted as if they were interest in an FCFE calculation?
I am aware that legally they are dividends and are only payable if there are profits available, but as they are a bit hybrid and share the ‘economic substance’ of both debt and equity, it is sometimes unclear how to treat them.
Yes – they are treated like payments of debt interest
Ok thank you for the prompt answer, so to be absolutely crystal clear, we are getting the free cash flows available to ordinary shareholders.
Yes – correct 🙂
Hi John,
Re: 3.5. The free cash flow to equity method
Cash raised from debt issues – why are we adding this to arrive at FCF to equity? Instinctively, I am thinking that this belongs to the debt holders and therefore should not be added.
Many thanks
Even though the cash was raised from debt, the cash is available for distribution to the shareholders.
Hi can i know where is the lectures for the remaining areas
Sir , could you please explain synergy benefits with an example? Thanks
please where are the videos on synergy and market based valuation methods
Synergy does not require separate lectures. Market based valuations are covered in this chapter (discounting the free cash flows to equity and free cash flows to the firm) and are revision from Paper FM anyway where you can find a series of lectures on the valuation of equity and of debt.
good day Sir,
i would like to know, when do discount cashflow using annuity to get value of the company and when do use the present value discounting formula.
kindly help
You never need to use the formula to calculate discount factors because you are provided with tables in the exam (and in the spreadsheet you can use the spreadsheet function to calculate the present value anyway).
Annuity factors are used when there is an equal annual cash flow (in the same way as was examined in Papers MA and FM).
Goodday sir,
When we are finding FCFE, can we take the interest deduction before taxing the EBIT ? so we can also account for the tax savings on the interest in the FCFE.
Hi John
Thanks so much you make it very simple and clear I just need to understand the question and practice more past exam questions.
Bola
Hello Sir,
I’m unable to understand, why we add cash from debt issues to free cash flows to equity. I mean it would add to the company’s cash, but it belongs to the debt lenders, not the equity holders of the firm, as it will be repaid ultimately?
Hello Sir,
I’m unable to understand, why we add cash from debt issues to free cash flows to equity. I mean it would add to the company’s cash, but it belongs to the debt lenders, not the equity holders of the firm, as it will be repaid ultimately?
The cash does not ‘belong’ to the lenders – it belongs to the company and they can do what they want with it. Obviously the lenders will receive interest and eventually receive repayment and therefore the company has less cash available in the years when interest is paid and in the year when repayment is made.
Okay, so it’s basically, who currently has the right to that cash.
Thankyou John 🙂
You are welcome 🙂
Good day Mr John,
Thank you for the wonderful lectures!
I need a clarification on the Amount needed to replace non-current assets when calculating the free cash flows.
I was solving Question 1c of December 2018 on Opao co and Tai co, in arriving at the free cash flow to Firm and Equity, I deducted the amount needed to replace non current asset which I assumed to be the same as depreciation; however, in the solution it was not deducted, it was only added to the PBIT to arrive at the Operating cash flow.
Please, can you explain why it was not added or just because it was not mentioned in the question that non-current assets will be replaced, I should have just ignored it?
Thank you
In future please as is kind of question in the Ask the Tutor Forum, and not as a comment on a lecture 🙂
However I am not sure that I understand you because the examiners answer has subtracted the amount needed to replace non-current assets in arriving at the free cash flows.
Thank you for the feedback and apologies for breaking a ground-rule.
You are welcome 🙂
Hello,
Regarding the combined asset beta I understand it is a weighted average of the combined company, my question is if it is a weighted average of debt and equity or a weighted average of just the value of equity, or can you use either?
thanks
The examiner has not been consistent on this, but best is to use the equity (because it is the equity that carries the risk).
Thank you John, for the video lectures, just want to clarify something,
when do we use this proforma; FCFE= EBIT- (tax on EBIT)- interest +non cash items-cash required for capital expenditure -/+ working capital changes?
and when do we use this one, FCFE= EBIT-tax + non cash items – cash required for capital expenditure -/+working capital changes – interest-loan required?
do these proformas give the same answers?
thank you
Dear Sir
I suddenly got very confused…which market value would one pay for a company, the value of the firm or value of equity?
Thanks
It depends what you are buying!! Whether you are buying just the equity or the whole business (including the debt).
Thank you for your reply. So in the case of the “asset stripper” you mentioned, they would only acquire the asset but not the debt?
Am I worrying about something that isn’t relevant to the exam? 🙂
That would normally buy the whole business (including the debt) but only if the thought that could sell the assets, repay the debt, and still end up with more than they paid.