Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › March/june 2018 question 1 (c)(i)
 This topic has 4 replies, 3 voices, and was last updated 1 month ago by John Moffat.

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November 30, 2020 at 12:10 pm #597127adamliew
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the question ask equity value of foshoro co
i know from the answer is total firm value and multiple the equity value then become equity value,here my answer
profit after tax 91
add back non cash item 112
minus working capital (98.2)
become 104.8my answer seem like ntg wrong, it deducted interest because it is free cash flow to equity and i add back the tax allow depreciation because it is non cash item and is deductible for tax.
for the growth rate i can calculate is 3% , for the ke, 2+2.09(7)= 16.63%perpetuity
104.8(1.03)/0.16630.03=791.92
my answer so different, sir can help me detect my mistake?November 30, 2020 at 1:42 pm #597150adamliew Topics: 21
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sorry sir, i just realised it said estimate equity value in acquisition using the fcf to firm.
so we use the fcff and find equity value,
by the way, if i using my method, will the answer be same? why not ? since it is value equity and fcfe also value of equity, and find equity also can fcff minus debt value become equity value. it really confusing meNovember 30, 2020 at 5:40 pm #597188John MoffatKeymaster Topics: 57
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The basic idea of what you were doing is fine.
The main problem though (and the reason for getting a different answer) is that the wording in the question is not possible. It says that profit after tax, profit before interest and tax, and cash flows are all growing at the same rate. That is actually not possible because interest is fixed and will not be growing. That means that if the profit after interest and tax will actually be growing at a higher rate than the profit before interest and tax.
It was actually poor of the examiner not to realise that, but it does mean that calculating the growth rate of the free cash flow to equity becomes impossible (despite what is written in the question).
August 25, 2022 at 5:14 am #664199beckymensah Topics: 0
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Please why is it that in calculating the asset beta of the combined company if you use the ratio proportion of their equity values the answer is different from when you use the exact market value amount. I thought it suppose to give same answer
August 25, 2022 at 9:47 am #664232John MoffatKeymaster Topics: 57
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They could only arrive at the same answer if the ratios were the same!
The market values of equity have been used as specifically required by the question.

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