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Sir, I have two questions regarding this part of the exam;
1. Why are we calculating the firm value using perpetuity method instead of a simple PV method?
2. Why are we deducting the TAD after PBIT? From my understanding, the depreciation should be adjusted right after PBIT, by adding it back, since it is a non-cash flow item. Please correct my understanding or add any information that I missed out during the lecture.Thank you!
I am not sure if I am looking at the same question as you. The only Paper AFM exam equation called Dricom is a very old question and was set in the December 1997 exam (not in 2010).
Thie question was a reorganisation and was not requiring a DCF appraisal – it was wanting to examine (and comment on) whether the reorganisation would satisfy the requirements of the various stakeholders.
The relevance of the tax is in order to calculate the profit after tax (i.e. the financial accounting profit after tax). We are not calculating the net cash flows because we are not required to calculate the present value and so adding back is not relevant.
Sir I am so sorry. The question I was actually referring to is Doric Co from December 2010 T_T. I truly apologise for my mistake!
As far as the calculation of the firms value is concerned it is the standard calculation of the PV of a growing perpetuity (which is the case here).
For the depreciation, although the depreciation itself is not a cash flow the question says that an amount equal to the depreciation is needed to maintain the current level of activity. This is very standard for the examiner these days and I do explain this in my free lectures.
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