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Hi Question Chrysos Appendix 3 finds the value of equity.
Why can’t we just take 80% of the FCFF of 47944 and derive at 38355.2 as the value of equity? Since the 47944 is value of debt + equity. And the capital structure is 20% debt and 80% equity.
Referring to Question Makonis where the value of equity is derived from 60% of 3672 (total value of combined company).
So why can’t we do the same?
Please tell me which date of exams these questions were in – sorry, but I can’t remember the name of every question in every exam 🙂
My apologies for not mentioning.
Chrysos Mar/June 2017
Makonis Dec 2013Please help me solve this. I appreciate your time.
Same problem comes in Cigno Co(Sep/dec 2015) Where we find the value of Anatra Co after it becomes a part of Cigno Co but we dont get the same answer if use the new equity proportion of 60%
Hope you could clear it out John. Thanks
Chrysos:
The problem is that immediately after the restructuring, the debt will not be 20% of the total value (they are cancelling the existing bonds and converting the overdraft into a long-term loan). I appreciate it does state that they aim to maintaining a long term capital structure of 80% / 20%, and this is relevant for the calculation of the WACC, but that is certainly not the ratio immediately after the restricting program.
Cigno:
The position is not as clear here. However the clue for getting the examiners solution is that the information about the gearing ratio is all given under the heading ‘estimating the combined WACC’ and the examiner only expected that gearing be used for that purpose.
But as always, so much depends on assumptions as always in P4. There is never just one correct answer – state your assumptions clearly and make sure your workings are easy for the marker to follow (write what you are doing whenever it is obvious). If what you are doing is sensible, and clear for the marker, then you will pass 🙂
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