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  2. hi john, can you please do more recorded live revision lectures for december 14, questions, 2,3 4. and the same for june 2014, questions 2, 3 , 4. and also december 2013. so we can get a better idea how to tackle some of these questions. im preparing for march 2020 exam.

    • Sorry, please ignore the question above, but please answer to this instead:

      To calculate “additional value to shareholders of the acquirer”, i would do it as:
      MV of Equity of combined company (PV of FCF – MV of debt) – Sum of MV of E of individual companies (PV of FCF – MV of debt) = additional value to shareholders, correct?

      To calculate “additional value to the acquirer”(which this question is asking for), from the calculation the answer have shown, it is calculated as
      MV of combined company (PV of FCF) – Sum of MV of E of individual companies (PV of FCF – MV of debt) = additional value to acquirer.
      But WHY? shouldn’t i do it as MV of combined company (PV of FCF) – Sum of MV of individual companies (PV of FCF) instead?

      • The question is calculating the additional value to the shareholders and has used FCFE (not FCF) to calculate the value of the equity.

      • but the question says “avem co then expects the multiple of the TOTAL FCF of the combined company to increase to 7.5”? sorry the wordings are really confusing for me.

      • Sorry for confusing you. The examiner has been a little poor in his wording. However in the paragraph below the extracts from the SOFP’s he says that the shares a currently at a multiple of 7.2 of its free cash flow to equity. Later in the same paragraph he says that it will increase to 7.5. Although he does say there that it is a multiple of the free cash flow, the wording does imply that he actually also means the free cash flow to equity.

        I must admit that it is ambiguous to word it as has done, and therefore if you interpreted it as it is written then you would still get the marks, provided (as always) that your workings were clear and that you stated your assumptions. (There is rarely just one correct answer in AFM, especially in question 1, and it is therefore vital that you state your assumptions always).

  4. Hello Professor,

    This is a question from the exam kit Q11 – Pursuit Co.
    Maybe you could help me understand how they calculated PV (after 4 years) for Fodder.
    this is what is in the book but I do not understand what formula was used to calculate the value 28,067.
    {4,443 x 1.03 / (0.13-0.03)} x 1.13 ^-4

    Thanks for your help

  9. Dear John, thanks for excellent lectures. But could you pls clarify:

    Valuing ‘Fugae’ you use FCF to Equity and discount on the cost of equity. You treat the result as company value if ‘Fugae’. But isn’t the result only Equity value of ‘Fugae’ and we have to add cost of debt(bonds) to come to the company value?
    Almost nobody asked this question, apparently the answer is obvious, but pls kindly explain. Thank you for your time!

      • John, if so, the proposed purchase price of 1,200 mill from Avem is only for shares/equity value of Fugae (922.5 mill) or for shares/equity + debt: 922.5 + 380 = 1,302.5 mill?

      • Dear John, just to close this thread

        The question states – “proposal to acquire Fugae Co for $1,200 million”. No specification if it is only equity or plus debt.
        Since the question of debt never appeared in part i) it apparently assumes the proposal was only for equity.
        How can we know what is the proposal for?
        And valuing the companies through shares price and cash flow to equity the answer (and you) use “value of company’ interchangeably with “equity value”, while we know the basics that ‘company value’ = ‘equity value’ + ‘debt’.
        Shall that be general approach to the p4 questions that if it does not say directly or indirectly about debt, it must be assumed the valuation question is about equity?
        I
        Thank you very much again for your time! I appreciate your help.

      • To an extent, it is an assumption. Always in P4 (especially for question 1) you will need to make assumptions (which is why the questions always ask for your report to state your assumptions). Provided you state your assumptions you still get the marks, even if you make different assumptions (and therefore get a different answer) from the examiner.
        It also highlights the importance of making sure your workings are easy for the marker to follow.

        Although the question does not specifically ask you to use ‘free cash flow to equity’, the fact that it is mentioned throughout does suggest that this is the approach to take.

        Also, strictly, although the value of the business is the equity plus the long-term debt, the company is the shareholders and so strictly the value of the company is the value of the equity. However even exam questions do tend to use the words as though they mean the same.

  11. Why is the bond information given? In a question like this to calculate the value aren’t we suppose to calculate the Free cash flow to firm in which case to add the value of debt back?

  12. Hi John.

    Thanks so much for your explanations.

    Would you be able to clarify for me the use of dividend valuation model. I follow calculating rb growth, but we the apply the dividend valuation model to free cash flows and not to dividends. Would the valuation of shares using dividend growth not also give us the value of equity?

    My assumption here is that if we were given cost of equity we would use that rate and dividends to value equity, but because we are given WACC instead, we must use free cash flows instead. Is that correct?

      • Hi John, I still do not understand why for the valuation we take the free C/Fs and not dividends. If we used the formula, then instead of using the full 76.5 Mio we should have used 22.7%x75.5 Mio, as this was the portion actually paid out as dividend. I don’t see how the explanation over the WACC fits in here, as it is my take that we are talking about different valuation models all together. We have not been given the WACC (unless I misunderstood). Thanks!

      • But we don’t know what the future dividend policy will be, and ultimately all the free cash flows to equity will end up going to the shareholders.
        As per M&M, in theory the dividend policy itself is irrelevant.

        I am not sure which part of the question you are referring to when you ask about the WACC.

  13. Thank you! wish we could think logically as you do when answering. But i appreciate the tip on labeling my appendix workings. I have always assumed the marker will fumble through.

  14. Hi John

    You make it look so easy – Great helpful lecture on a very detailed question

    Why, when discussing the 30% premium for Nahara on the 922.5m current MV we are not making reference to 1200m offer price .
    this figure is pretty close to Current MV 922 & 30%
    thanks

    • Thanks (although I appreciate that it is obviously easier for me when I am not actually under the pressure of the exam itself) 馃檪

      It would certainly be valid to mention the offer price in the discussion, however it is not relevant for the calculations because the value is being based on the future expected earnings (and the question was asking to report on the additional value).

  17. help on why par 8 was not taken in account which was about estimation for cost of debt and bond price for Fugae company..when determining market value of Fugae company.

    • The information is taken into account when calculating the beta for the project that Fugae is considering (because we need the market value of the debt, and we calculate it using the the coupon rate etc.)

      It is not relevant for part (c)(i) of the question because we are calculating the value of the equity based on the free cash flow to equity.

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