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In Doric 3rd proposal is management buy-out, In the solution
Estimate of the value of new company:
cash flow before interest payment is 28.4m
Then it is written as:
Estimated value based of cashflow to perpetuity = 28.4/(0.11-0.05) = $473.3 m
While cost of capital is 11%, i want to ask why 5% is deducted from 11%Now 2nd question relates to adding interest saving from cancellation of debt, in Doric proposal 2 says to restructure, unsecured bonds are cancelled and replaced with ordinary shares, while calculating income position money saved from interest on debt due to the cancellation is not included as interest savings
while in Evertalk, in proposal of restructuring, bond are cancelled and ordinary shares are issued to existing bond holders, same situation as in Doric but
calculations of free cash flow of the company includes interest saving on existing bonds which are cancelled in restructuring
I want to ask why in 1 questions of restructuring they added interest saving and in the other they ignored,
ThanksDoric the reason for deducting the 5% is because might be cost of debt and debt is tax deductible hence to arrive at the value of the company it must be deducted. Also, note that the value $473.3 is the Corporate Value and you have to deduct debt to get the Estimated Equity Value of the company.
Thanks and bye for now.
Mohammed T. Elomi
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