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Hi John,
In question c)i) Estimating the additional value created for Avem, the new value of Fugae is $76.5 million.
1. I don’t understand why this $76.5 million is the new value of Fugae?
2. In calculating new value of firms, will we only use free cash flow to equity method generally?Please clarify these for me. Thank you 🙂
The method of valuation depends on the information given in the question.
This question specifically states that it is a PE valuation and so the new value (after the takevover is 7.5 times the earnings.
The earnings increase by 76.5 (Fugaes earnings) and by 40 (the synergy benefits), and the new total earnings are then multiplied by 7.5 as per the question.
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