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Q no. 1 June 2012
Requirment no. iiI am little weak in this area (business valutation)
Cash offer
In calculating the EPS, why the earnings of Nente co. are used ( why not the Mije co.?)
or is there any other solution of this prob?and one more thing, in share offer
how we will find the gain in value of share of Nente co. and kindly explain the logic also.?
Milje is considering buying Nente and so they are looking at the extra earnings that they will get from Nente if they do buy it.
With regard to the share offer, the current value of Nente’s shares is $2.90 per share.
The new share price for Mije’s shares is $5.13.
(if you are not clear how either of the share prices have been calculated, then ask again)As a result, the cash offer will mean that Nente’s shareholders will receive $2.95 for a share currently worth $2.90 – a gain of $0.05, or 0.05/2.90 = 1.7%
The share offer will mean that they get 2 shares in Mije, worth 2 x 5.13 = 10.26, for every three shares in Nente, currently worth 3 x 2.90 = 8.70.
So their gain is 10.26 – 8.70 = 1.56, or 1.56/8.70 = 17.9%
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Hi Sir,
Can you explain further the gain to Mije under the cash offer?
What I’ve done is:
Combined earnings=3,200,000+620,000+150,000=3,970,000
Combined value=3,970,000*15=59,550,000
New share value=59,550,000/10,000,000=5.96
Mije gain=(5.96-4.8)/4.8=24.17%In the Kaplan book the answer is 9.4%.
Can you clarify? Would my answer got any marks?
Thank you very much!
What Kaplan do is the same as the examiner in his answer.
The real problem with your answer (and the reason it is so much different) is that you have ignored the amount paid for Nente. This reduced the new share value and therefore the return.
However, otherwise the approach is OK and although you would have certainly lost some marks, you would still have got marks 🙂
(Provided you make sure your workings are clear – it is almost impossible to get the correct answer in any P4 question, but that does not matter. The marks are much more for the approach and provided the marker can see what you are trying to do then you get the marks.)- Topics: 0
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Thank you very much for your prompt reply!
Your comments are really engouraging!Hi John,
It’s the same question (Nente Co. June 2012) but I couldn’t search anyone asked this before.
It’s the value of follow-on product. The answer only considers Value of option to delay ($603592) increasing the value of Nente. Why the answer doesn’t consider NPV ($405K) plus Value of option to delay together? The NPV also increases the company’s value but I don’t understand the answer ignores NPV but only use value of option.
Many Thanks
I think that the last but one paragraph from the end of the report (in the examiners answer) answers your question.
If it does not, then I do apologise, and please do then ask again.
The report says value of the rights allow to delay worth $603592 and add 8.7% to the value of Nente Co share. I would expect the report has assumption of ignoring NPV and only considers value of delay as the value increasing Nente’s value. Did I miss any point from the report or mis-understand about increase of value (I always add NPV and value of real option as total value)?
Many thanks
The report could have been phrased a bit better – it was meaning to show the two effects separately.
What you say is correct – the total value is the NPV + the value of the option.
Hi John,
In Nente when calculating FCF, first of all we take PBT – tax =Pat + add back depreciation – investment in NCA = FCF
Now, don’t we calculate PV using 11%” coc? And after that calculate perpetuity?FCF is $1180K and I’m confused because in the exam kit the perpetuity amount is calculated directly without calculating the PV of 1180K.
Hi John,
One more thing, In this question, b (iii) when calculating option to delay, how come the time until expiry is 2 years and risk free rate 3.2%? Shouldn’t the risk free rate be 3.8%?The FCF is a perpetuity of 1180 per year, inflating at 2.06% per year, and needs discounting at 11% per year.
To discount an inflating perpetuity, we use the dividend valuation formula (which gives the PV of any inflating perpetuity.
So we use Do = 1180. g = 0.2016, and Re = 0.11.The first sentence under Proposal 2 in the question says that it will be 2 years.
The question says that the company pays interest at 7% which is 380 basis points (i.e. 3.80%) above the risk free rate. So the risk free rate = 7 – 3.8 = 3.2%.
Hi John,
Back to option part on this Q1, why the question presents an adjusted figure for the initial investment ($2.500 vs $2.434-PV for 2 years) for the NPV purposes?. Shouldn’t be the PV of initial investment equal to $2.500??
Q4a) – Furlion Co: the figure for initial investment ($15m) for the expansion option was not adjusted to PV for 3 years!!!
I’m getting confused as I can’t see what is different in these two question papers for the same matter (option to expand). Please help me.
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