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The answer for this question used FCF which gives the value of the whole company? Equity and Debt. SO my question is, if we remove the value of debt that should leave us with the equity value why is this not done to compare the 10mil offer.
SO for scenario A for example 18.8(value of whole company)-7(value of debt)=11.8 which mean the 10 mil offer isn’t enought.
For Scenario B 10.4-7=3.4 so the 10 mil offer is better.
the reason im confused is because in the answer they initially compared the 10mil offer to the value of equity which was 20m shares at 0.46 price per share which has a equity value of 9.2 mil. why not keep it consistent when doing the FCF valuation and remove the value of debt?
I am puzzled, because if you are asking about the question Daron (as a previous P4 exam question) then there is no mention in the question of a 10M offer 🙁
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Thank you for your reply, im not sure if BPP amended the question and added it but it is right above the “financial projections for the hotel purchase” towards the end, option (i) “Recommend the sale of the company now. An informal, unpublished, offer of 10 million for the company’s shares has been received from a competitor.”
But is my understanding above correct? with regards to the FCF being the total value and deducting the debt value will leave the value of equity.
I just want to understand when to deduct and when not to deduct the value of the debt in a question?
BPP does not have the question Daron in their current edition of their Revision Kit.
However, what you are saying is true, The FCF will give the total value of the business. If (and only if) the debt in the business is to remain, the the value of the equity will be the value of the business less the value of the debt.
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Thanks John, Daron is question 1 on the first mock.
So if a company wants to purchase a organisation and pay of its debt it would be FCF without removing the value of debt? Hence the total value of the firm.
And if a company wants to purchase a organisation without clearing of its debt it would be FCF less value of debt or FCFE?
Thanks again.
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