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- Topics: 43
- Replies: 65
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Hi John,
1)Just need some clarification on this question, i understand the company being taken over is in the same business area so why is the target company’s equity beta being used wouldn’t it be better to use Laceto’s equity beta(which isn’t given so that’s the only reason i think they used it)?.
2)Since the targets equity beta is used and assuming that the gearing remains the same is this why the beta is not ungeared and then re-geared to suite Laceto’s capital structure?
3)Also it seem’s they are using the FCF method so why isn’t Omnigen’s debt being removed(12mil), could FCFE be used here as well since we are given the interest paid, unless it is not used on the assumption laceto will be paying of the debt?
1. Because it is in the same business sector, you would expect the asset beta to remain the same (not necessarily the equity beta because the equity beta includes the gearing risk).
2. Usually you would ungear and regear the beta. However the question specifically says what will happen to the beta because of the change in gearing.
3. The value of the business as a whole depends on the free cash flow of the business (regardless of how it is financed – how it is financed determines the applicable discount rate.)
- Topics: 43
- Replies: 65
- ☆☆
Hi John,
Thanks allot the first two are clear, however the third question above:
We are trying the find the value of the equity aren’t we? because the P/E method used aswell as using the share price * number of shares both gives us the value of the firms equity and these were used as comparisons in the answer.
So to keep consistent would’t the value of a target be the FCF less debt value to leave the value of equity? however they did not do this in the answer and just had it at FCF(which is total value-debt and equity)
Thanks in advance
I think I slightly misread what you were asking in (3) – sorry 🙁
Yes – what the answer has done is effectively assuming that the debt is taken over as well.
But provided you state your assumption you will still get the marks (even if you assumed that the debt was being repaid and therefore subtracted it, or if you used FCFE).- Topics: 43
- Replies: 65
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Hi John thanks once again.
By Taken over you mean paying of the debt or not paying of the debt and making it a part of the combined firm?
1)So for example A wants to take over B and not clear B’s debts we value using FCF
2)If A takeover B and say it will clear the debt is the value FCF-Debt/FCFE
or is it the other way round?
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