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Hi,
1. “The premium payable on acquisition should be based on the present value to infinity of the after tax excess earnings the company has generated in the past three years, over the average return on capital employed”
1.1 Present value to infinity – I have not come across this in any lecture or textbook. Can you please explain what this is and how it is calculated?
I have the solution in front of me but I cant work out the logic behind the premium calculation.
I valued Strand Co using FCF method.
2. Additional value created by cash and bond offer:
I calculated this in totals using the market value ($80) of the bond using the bond valuation method – PV of future cash flows, discounting at 7% (strands cost of capital)
year1-6 $3.00
year 6 $100.00Number of bonds: 60 bonds (300/5)
60 * $80 = 4800
Cash element: 1.25*900shares = 1500Value p/s of strand 6300/1200 = $5.25
I know the calc’s in point 2 are wrong but why is the nominal value of bonds being used rather than MV?
3. In calculating the potential value of the 12 Hav shares, why is the nominal value of the bond being used?
thanks
Please tell me the date of the exam that this question was in (I have all the past exams but I cannot remember the name of every question in every exam 🙂 )
1 The discount factor for a perpetuity is 1/R – this is covered in my lectures for Papers MA, FM, and AFM.
When it is an inflating perpetuity we use the dividend growth formula that icon the formula sheet (and this is covered in my Paper FM and AFM lectures).2. It is because these are new bonds and the question specifically states that they will get $100 bond for every $5 nominal value of Strand shares.
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