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Hi sir
In bpp solution, when calculating the WACC to discount omnigens cash flows, they use the Laceto loan cost for the cost of debt.
Surely if we are trying to ascertain the value of a company then we would need to discount at that company’s WACC, not at the acquirer’s WACC?Thanks
In the same question, again looking at the wacc to discount omnigens cash flows at, bpp use the Laceto post acquisition gearing split of 18%-23%, to value omnigen.
When comparing this with a previous question, Pursuit 6/11, bpp used the debt cost and gearing of the company being acquired (Fodder) when calculating the WACC for valuing Fodder’s cash flows.
In both questions, the post acquisition gearing split was different from the target company’s gearing split, but in one solution the target’s gearing and cost of debt is used for valuing the target and the other uses the post acquisition split.
Sorry for the long explanation, but I wanted to make it as clear as I could.
Thanks a lot
In calculating the WACC to apply we always use the post-acquisition gearing ratio of the company doing the acquiring. (We will use the asset beta of the company being acquired to get an applicable equity beta and hence a cost of equity to use, but this is a different issue)
In Pursuit the same applies. The question says that Pursuit’s gearing is 50:50 and this is what has been used to calculate the WACC (on the assumption that the gearing ratio will stay unchanged).
Thanks sir – but in the pursuit question, when valuing fodder, the WACC (13%) is based on a gearing split of 90/10 e/d which is the gearing split of fodder (company being acquired) pre acquisition??
When valuing Fodder – yes. But when valuing the combined company they have used 50:50.
But for the Laceto question, the post acquisition gearing split 18/82 or 23/77 was used,for discounting the cash flows of the company about to be taken over, Omnigen
But it has just occurred that me that was maybe this was done as these were projected future cash flows that were being discounted, as opposed to past flows in the fodder question?
Dear Sir,
Can you please explain a reason as to why the post acquisition beta of Omnigen has not been de-geared and then re-geared using the gearing of Lacto.
Also, as the gearing of Lacto will change as a result of this acquisition, isn’t it type II of acquisition?
Many Thanks.
It is because the post acquisition beta is different due to the change in gearing and so effectively the gearing and regearing has been already done for you.
Certainly APV is regarded as being a better approach if there is a substantial change in the gearing. However, when the examiner wants an APV approach he says so in the requirements (and it would be difficult here to do the necessary calculations). It would, however, be a good point to make within the report.
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