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Dear sir
i am having trouble solving part c of this queation in which we need to calculate the return that the company needs to earn on the new debt capital before interest is paid.
why we are not deducting net investment as in free cash flow to equity it has been deducted? and wat is the use of 4% earning growth rate which is specified in second paragraphy
it would be really helpful if you can tell how calculation is done in part c
thanksThe free cash flow to equity given in the question is already after subtracting net investment.
What we need to do is calculate how much greater it needs to be in order to be able to pay the necessary extra interest and still maintain the value of the equity.
The earnings growth rate is not relevant because what we are trying to calculate is how much do the earnings need to increase by (and therefore what return needs to be earned from investment of the new capital that has been raised). Maybe we will actually earn more (or less) but this is not asked for.
Thankyou so much. i get it now 😀
i have one more questiin regarding ennea co and bbs store. In ennea co we took the income statement balance and adjusted it in balance sheet statement but in bbs we didnt made any adjustment regarding adjusted profit after tax? is this because we used budgeted statments in Ennea co and current year statement in Bbs store
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