Coden Co.(Already serached the forum on this question but none asked before)

[blazingfire]

Dear John,

Hope you are well.

In Coden Question Dec 2012 when calculating the cost of capital after proposal we need MV of equity which apparently is calculated on the basis of free cashflows of coeden over prepetuity discounted at cost of equity. My question is when the debt is repaid, the cashflows in terms of debt repayment should be reduced as well as they need to be topped up for not having to pay 70% of interest as was the case before. But we didnt do this calcultion to update the free cashflows, although the sales proceeds of hotel properties is not given. Why is this the case?.

In my view not updating cashflows will reduce the Free cashflows to equity and so will increase the cost of capital.

Regards,

Blazingfire

[John Moffat]

Using free cash flows to equity is effectively using the dividend valuation model – i.e. that the market value of the equity is the present value of future dividends discounted at the shareholders required return (cost of equity).

The money from the sale is part used to repay debt, and the rest is retained – therefore the dividend is not affected and the cash flows do not need updating for it.

[blazingfire]

Thank you. Much obliged John.

[John Moffat]

You are welcome 🙂

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