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In this question, we are tole that combining the business reduces operation cost (including depreciation) from 76% of sales to 70% of sales. Fair enough-when it came to adding back the depreciation to find the free cash flow, all that was simply dome was to add the capital allow of both companies and inflate at growth rate of the combined co.
Growth rate=6%
If we are going to be accurate-the synergy actually reduces the capital allowances by a relative figure of 6%-which is then cancelled out the the increase of 6%.
Is my logic right-or is this too tedious to do in the exam and we sould make similar assumptions like this answer and move on?
thanks
If the question never mentioned synergy have improved capital allowance, pls don’t assume, no mark added.
Yes!!!
Never assume faster than question/examiner………. one thing P4 is already very technical and if we make it more technical on our part we will be in trouble during exams…..!
Hi tutor,
My question is
As For all shares after acquisition, share price of acquirer applies and is it same for cost of equity? while calculating wacc.
In BPP calculation they used 2 types of cost of equity, Ve of Paxis (acquirer) at its Ke and Ve of wragger at its pre acquisition Ke. Rather than using Ke of Paxis
Please explainThe question asks first for the current values of the individual companies.
For this we need to use the WACC for each individual company, and when calculating the WACC we need to use the cost of equity for each individual company (using the relevant betas).Ok thanks and for calculating the wacc of combined company, Ke of acquirer will be used in valuing the new shares in Wacc, is it correct?
No, because the level of risk will be different. You need to take a weighting of the individual costs of equity.
I have a question regarding how market value of Debt have been calculated for both Paxix and wraggrer Co.
Please anyone can share the Knowledge?The question says that the ratio of the debt to the (equity + debt) in Paxis is 30%.
Therefore the equity must be 70% of the (equity + Debt).
We know the market value of the equity, and therefore the market value of the debt must be
3/7 of the market value of the equity.It is the same logic for Wragger, where the ratio is given as 55%.
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