laceto 6/01

Laceto is acquiring Omnigen. The discount rate to use whenever a company is investing (whether investing in a project, or, as here, investing in buying another company) is determined by the riskiness of the specific project, and the gearing used in financing the project. The riskiness of Omnigen is determined by Omnigens beta (which might be higher or lower than Laceto's current beta, but that is not relevant). The gearing relevant is Laceto's borrowing (because it is Laceto that is doing the investing).

Thank you sir.

You are welcome :-)

Hi Sir, for this same question Laceto, why is it that 19 is being used when finding the growth instead of 32. I calculated $256 and $299 with a 3% and 5% growth respectively while BPP has $186 and $212.

To get the value of the flows from time 6 onwards we use the dividend growth formula, and you can certainly use 32. However, that formula would give a PV (time 0) if the flows started at time 1. In fact they start at time 6 which is 5 years later. So using 32 in the formula gives a PV at time 5. So we then need to discount that answer by 5 years. (Which comes to the same answer as what BPP have done - discount for 5 years first (19) and then use the formula)

Sir, I'm also finding it difficult to figure out why 19 (discounted value)is being used when calculating for terminal value of Omnigen instead of 32 (free cash flow value). In another similar question- Intergrand (SFM 12/02), Bpp used 13.2 ( free cash flow value) NOT 9.3 (present value) to determine the terminal value. My question is, how do I know when to use PV and when to use free cash flow value? Thank you.

BPP have made a mistake in the Laceto question. They should have used 32 and not 19, and their answer is wrong. (You either use 32 and then discount the answer for 4 years (multiplying by 0.592), or alternatively you use 19 and then you don't need to discount the answer because it is already discounted - both ways would give the same answer. BPP has got muddled and got it wrong :-) )

Thank you very much for that clarification.

You are welcome :-)