Chrysos- Q1 March/June 2017 – MBO part

This topic has 3 replies, 3 voices, and was last updated 8 years ago by John Moffat.

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November 27, 2017 at 1:24 pm #418410
apanda
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Good afternoon John,

For unbundling the manufacturing business unit answer part, the Estimated Value was using cash flow 435 to calculate market value?

Why, we don’t use free cash flow to equity FCFE to calculate?
cash flow + (add back) depreciation = 435+ 310 = 745 FCFE

The deprecation is not the real cash flow, isn’t it?

Thanks in advance.
November 27, 2017 at 2:09 pm #418421
ahmedp4
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“The annual reinvestment needed to keep operations at their current levels is equivalent to the tax allowable depreciation.”

Because of this one. So if you get this statement in any question to calculate free cash flow then ignore depreciation to add back.
November 27, 2017 at 2:11 pm #418424
ahmedp4
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Dear John,

Please correct me if I am wrong.
November 27, 2017 at 2:18 pm #418427
John Moffat
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If you want me to answer in future, then you must ask in the Ask the Tutor Forum. This forum is for students to help each other.

However, what you have written is correct – based on that sentence in the question, we do not need to add back depreciation (because there is a cash outflow of exactly the same amount).

It is something that the current examiner almost always does in NPV questions (and an assumption he makes even when the sentence does not appear in the question).
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