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Hi Sir,
When calculating the Value of the new firm using free cash flows, why is it that only the value based on the perpetuity is used to decide whether the MBO will be worthwhile?Would it be incorrect to calculate the value of the company as follows?
(FCF of 33.4) + (Value based on perpetuity of 461) ÷ Discount Factor @ 11% – 0.901. ?Thanks
I do not understand why you want to take a perpetuity of 461.
The value of the company is the present value of the free cash flows.
The free cash flows are $33.4 per year in perpetuity, inflating at 3.5% per year. We want to discount at 11%.
Therefore, as always with inflating perpetuities, we use the dividend growth formula and arrive at a PV of $461 as the value of the company.
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