June 2011

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November 21, 2019 at 3:40 am #553243
toushiga
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Hello Sir, for PYQ June 2011 Q1 Pursuit Co
Why the synergy benefits calculated using Firm value rather than using the equity value as the question mentioned the capital structure of combined company remain as before?
is it because it’s not MV debt to equity ratio provided?
Thank you.
November 21, 2019 at 1:09 pm #553291
John Moffat
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The question specifically asks for you to use the free cash flow to firm method, which gives the total MV of the business.
The increase in the total MV due to synergy is the gain which all ‘belongs’ to the shareholders.
November 22, 2019 at 9:54 am #553444
toushiga
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The MV of the firm(FCFF) does not consist of MV of the debt and MV of the equity?
Why the total gain(synergy benefits) will all belongs to shareholders only?
Sorry, I don’t understand, Can you can explain further, please? I will appreciate it, Thank you so much.
November 23, 2019 at 10:43 am #553496
John Moffat
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Yes – the MV of the firm is the MV of debt plus MV of equity, which is the total MV of the business.
In all circumstances it is the shareholders who are entitled to any gains (or suffer any losses). The MV of the debt is not affected by how well the company is doing.
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