- This topic has 13 replies, 6 voices, and was last updated 7 years ago by
.
- Posts
Dear John,
I did watch your video explaining the Dec 2014 paper but I feel that I just need some more clarification on part (c) (i) of the question.
First of all, when you valued the equity of Fugae Co (pre acquisition) then usually Ve is FCF to equity discounted by the Ke, why didn’t you just take $76.5M (FCF to equity) and discount it by 11% (the cost of equity). The question I also have here is that which discount factor would you use? I get very confused when you use the DVM. Is that you are saying that the value of the company is the PV of it’s FCF to equity which will occur in future years discounted at the Ke? Why incorporate the growth, what’s the logic?
Also, I don’t understand when you find the value of Avem & Fugae (on a combined basis) why you are using FCF equity. In my study text, when doing post acquisition valuations and adding the two companies together we just take the (Ve = value of equity) values together and add those two together and any synergies. So why not just take the $922.5+$12000 = $12,922.5+ 40 synergies so the new combined value = $12962.5
I feel confused when you use the FCF to equity. Usually we just add the Ve (value of equity) of the two companies with synergies and find the combined company value (that is what was the approach in Sigra Co from Dec 2012). And what is this whole thing of 7.5 multiplier? What does this mean “Avem then expects the multiple of the total free cash flow of the combined company to increase to 7.5” Is he talking of FCF to equity or free cash flow to the firm for the combined company? It is not clear. Please explain.
Thanks.
1. The value of the equity is indeed the free cash flow to equity discounted at the cost of equity. But the free cash flows are not just for one year, it is going to be 76.5 every year in perpetuity and it is going to be growing at 2.5% per year. We need the present value of all the future flows, and because it is in perpetuity we can only do it by using the dividend valuation formula.
2. There are two reasons. One is that adding 40 would not be the benefit of the synergy – it is 40 extra each year!!! Secondly, because the multiple is changing it means that shareholders expectations of future growth are changing, and this will also have an effect on the market value.
3. The bit about the multiplier is not any sort of standard approach that you are supposed to have learned. It is simply a question of following the instructions. And the way he defines it in the question means that it is effectively the PE ratio (and that you obviously should know about).
I was at an examiners meeting in February of this year, and the examiner did admit that this was overall a very hard question (and therefore hopefully it will be a bit easier this time). However, as he said (and as I pointed out during the lecture) there are still plenty of marks to be got, even if you did struggle on this bit. You need to get 50% and nobody is going to be able to complete the whole question perfectly. The people who pass are those that leave bits they find too hard and make sure they get the marks on other bits.
So the 7.5 multiplier is basically saying that whatever figures we get when we add the synergy and the FCF to equity of the combined company then we multiply it by 7.5 as the market value will be 7.5 times greater right? He should have worded the question more appropriately in that case. The wording wasn’t so clear.
Hi John
I have questions over the wordings in the question
Nahara expects to receive a premium of at least 30% of the estimated equity value of Fuage.
I thought the price paid to Nahara should be 922.5 x 1.3 Instead of 0.3.
Is premium of 30% different from 30% premium?
Cause in Dec 13 Makonis – the price is calculated as 1.3 x 480m instead of 0.3 x 480m
In Makonis the premium is based on the current value of the shares.
In Nahara the question states that the premium is based on the estimated equity value.(You can find lectures working through the whole of the question Nahara, linked from this page:
https://opentuition.com/acca/afm/afm-revision-lectures/ )
- Topics: 0
- Replies: 1
- ☆
Hi John
Kindly explain to me that how to calculate this answer.
Thank you0.89 = PAB × 0.15 + 0.80 × 0.85
PAB = 1.4@masterwei
This is basic math
0.89= (PABx0.15) + (0.80×0.85)
0.89= (PABx0.15) + 0.68
0.89-0.68 = PABx0.15
0.21 = PABx0.15
0.21 / 0.15 = PAB
PAB = 1.4my tip is that you break the equation into few steps to avoid making errors.
Good LuckMr Moffat this video lecture was very helpful. I always appreciate your work and efforts that you make for us on this free website.
Can you please upload some more past exams lectures.Thanks.
Umair: Thank you for answering Masterwei, but please don’t answer in this forum because it is Ask the Tutor (but please do help people in the other P4 forum).
With regard to more lectures on past exam questions – yes I will, but only when I have the time available.
Mastwei: umair’s answer with regard to the calculation is correct. If you are not sure why we are doing it in the first place, then you do need to watch the lectures on CAPM and then ask again if necessary.
Oh I didn’t realise that I am really sorry.
And thanks for considering my request. I will keep an eye on new uploads.
Thanks.
- Topics: 16
- Replies: 38
- ☆☆
Dear John,
Isn’t it the same thing?
We still calculated premium on the total market equity value of Fugae but we calculated its market value not using its share price market value (which we are not given anyway) but through using growth model and FCF (Terminal Values)?
Also, in calculating the Market value of Fugae at $922.5, why did we not deduct the 4 year redeemable loan? I thought that when using FCFE to estimate a company’s market value, we take into account (deduct) any debt repayments as well (apart from CAPEX adjustments, and tax & interest (i assume we didnt bother with tax and interest here because the free cash flow of $76.5m is adjusted for that?)).
Thanks in advance!
I am not sure what you mean when you say “Isn’t it the same thing”.
Using free cash flow to equity gives the equity market value. (It is when using free cash flow, that we get the total market value of the company).
(And I don’t really understand why you put “terminal values’ in brackets after FCF. It is nothing to do with terminal values – they are what we get when we add on interest.)
- The topic ‘Nahara Co Dec 2014 Q1’ is closed to new replies.