- This topic has 9 replies, 3 voices, and was last updated 9 years ago by
.
- Posts
iam using kaplan revision kit in its answer Report for managers of Daron
offer to purchase the company
it has written An offer of $20million is an 8.7% premium over the current share price ( which is quite low
it has also calculated expected present value is $30.3millionI want to know how this 8.7% premium had came
and also want to know that why it has not use the formula in calculating free cash flow after year 20X9 -Y3 as FCF (1+g)/WACC-g
The current share price is $0.92. There are 20M shares, so the total market value is $18.4M.
So the premium is 20 – 18.4 = 1.6M. As a percentage this is 1.6/18.4 = 8.7%
The formula (which is effectively the same as the dividend growth formula) is only relevant for flows in perpetuity. Here we need to discount for just the extra years and so the formula is not relevant.
Dear Mr Moffat
In this question, when considering the sale recommendation, the answer compares the estimated value of the existing operation using FCF (WACC to discount) with an un-offcial offer to see if it is worth the sale.
I think the estimated NPV (FCF discounted at WACC) is the value of the firm, thus it will the deduct the debt value to get the equity value. This equity value will then compare with the offer. However, the answer did not deduct the debt value. I must be wrong somewhere. Can you please explain on this?
Thanks
Hanhvn
It is assuming that if the business is sold then the acquirer would take over all of the assets and liabilities (including the debt). (If the debt had to be paid off before the sale, then you would have been correct, but this is unlikely)
Dear Mr Moffat,
Even if the question states that “An informal, unpublicised, offer of 10mil for the company’s SHARES…” we should also assume that it is the Firm’s value, rather than the Equity’s value, that is to transfer?
Many thanks,
HanhvnYes! Suppose you own all the shares in a company. Then if someone takes over the company it is you that they will pay, but you would expect them to take over all of the assets and all of the liabilities of the business (unless there was some agreement that you would pay off liabilities before they took it over, which would be unusual).
Dear Mr Moffat,
So if the question asked to estimate the value of the share then we would have had to deduct the debt from the firm’s value similar to question Nente in June2012 ?
Thanks a lot.
Hanh
Yes. I know it seems similar, but there is a difference. They are proposing to buy the equity and a proportion of the debt. They have valued the equity but the final overall cost will depend on how much of the debt they take over.
- You must be logged in to reply to this topic.