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John Moffat.
John Moffat.-
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hj
- Topics: 59
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hello sir I have some very basic doubts in these two questions
In nente co (june 2012) they have asked us to use the free cash flow to firm method but why are we using that FCFE formula that is using k instead of WACC in the formula
My second question is in Havoc June 2013 in part (b) what formula are they using to find the excess annual premium also in which chapter is this formula mentioned in the BPP book also can u just breif me what are we doing in this part
Thanks alot in advance , this section of the website helps me alot as I self study.
John Moffat
- Topics: 57
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In Nente the free cash flows have been discount at the WACC of 11%. The question says that the overall cost of capital is 11%. (What symbol the examiner chooses to use is completely irrelevant).
For Hav Co, the answer is not using any standard formula. It is following the instructions that are given in the question:T “the premium payable on acquisition should be based on the present value to infinity of the after tax excess earnings the company has generated in the past three years, over the average return on capital employed of the biotechnological industry.”
hj
- Topics: 59
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so sir cost of capital is k or wacc?, I was confused that cost of capital is only denoted by k
and in Hav Co can u pls explain that how do we know the CE of biotechnology industry is 20% of CE of Strand. The line just states that the biotechnology’s pre tax CE is estimated to be 20% per annum so why are we calculating it as 20% of CE??
thanks alot in advance.
John Moffat
- Topics: 57
- Replies: 51317
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The symbols are irrelevant. k is sometimes used for cost of capital (ke is cost of equity and kd is the return on debt).
But the question says that the pre-tax return on capital employed is 20%. (It does not say the the pre-tax capital employed is 20% – that would be nonsense.)
hj
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