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Hope you keeping well, John
Had a question for the above. How come on the cash synergy benefit of $20m there was no tax adjustment on the FCF calculation.
Thanks In Advance
The answer has assumed that it is the net benefit (i.e. after tax).
If you had assumed it to be the benefit before tax then you would still have got the marks, but because it was not made clear in the question it is always best to state your assumptions.Dear sir,
FCFF of combined company is 216 m in Y0. (Current value term). Why answer does not inculde it in order to caculate FCFF (only caculate FCFF from Y1 onward) ?Thanks sir
Sorry, but I really don’t know where you are getting your figures from. Where are you finding 216M?
Dear sir,
It is from question.“It is thought that combining the two companies will result in several benefits. Free cash flows to firm of the combined company will be $216 million in current value terms, but these will increase by an annual growth rate of 5% for the next four years, before reverting to an annual growth rate of 2•25% in perpetuity.”
But time 0 is ‘now’ (there is no ‘year 0’ – time 0 is a point in time, time 1 is a point in time one year later (the end of the first year/start of the second year), and so on. This is a fundamental concept in discounting (and if needed do watch my paper FM lectures on investment appraisal).
The first FCFF will be in the first year and is therefore brought in at time 1. It is too late to get any benefit for the year just finished 🙂
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