June 2012-Question one

This topic has 3 replies, 4 voices, and was last updated 13 years ago by John Moffat.

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November 19, 2012 at 12:18 am #55458
michael13011991
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In question one, we are told that the the takeover will be cost synergies of $150,000 will arise for the foreseeable future. My question is when valuing the “New company” why did we not find the perpetuity of this figure before finding the market value for the new firm? (the answer just used $150,000)?

Thanks
November 19, 2012 at 2:43 am #107834
AQ!
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Yes!!!

Because we are using DCF technique while calculating MV of Nente Co…where as synergies are expected in combined firm and which is not valued on DCF basis..

If we were given CFs of combined firm and synergies then by DCF we should have put 150k in our format and discounted it as we find terminal value….

This is the reason i think……and followed the same while doing practice
November 19, 2012 at 6:37 am #107835
dazhong0703
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Because we are doing EPS, not using FCF model. Perpetuity is only in FCF model.
November 19, 2012 at 5:31 pm #107836
John Moffat
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dazhong0703 is correct – it is because we are doing a PE valuation which only looks at the current earnings.
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