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Sir in this question when its clearly stated that:
“Chrysos Co’s finance director wants to use Sidero Co’s ungeared cost of equity to calculate its cost of capital for the mining and shipping business unit.”
then why do we go about using M&M proposition 2 to find out the geared cost of equity??
my 2nd doubt from the same question:
Why haven’t they added $3288m (that the MBO team pays to Chrysos co. for acquisition of manufacturing equipment division) to estimated value generated for equity holders?
Currently they have just return that “Estimated equity value = $47,944m – $1,800m = $46,144m”
Isnt the $3288m also value addition for equity holders?
The question says that it wants to use Sidero’s ungeared cost of equity to calculate its cost of capital.
That is not saying that they wants to use that as the cost of capital – just to use it in the calculation (because the business risk is the same).
Obviously the cost of capital to be used will be different because there is gearing!
I mean to ask the 2nd doubt that I have asked:
“my 2nd doubt from the same question:
Why haven’t they added $3288m (that the MBO team pays to Chrysos co. for acquisition of manufacturing equipment division) to estimated value generated for equity holders?
Currently they have just return that “Estimated equity value = $47,944m – $1,800m = $46,144m”
Isnt the $3288m also value addition for equity holders?”
No – the examiners answer is correct.
The new value of the business is the PV of the future cash flows.
What they got paid ‘now’ for the assets they have sold ‘now’ is of no relevance. All that is relevant is the effect of both on the future cash flows.Sir but even if it has been paid right away, hasn’t it generated value for the shareholders(which is what the question is asking)??
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