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"Nessie Inc" example question of valuation of Type 3 acquisition (BPP Text)!

Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › "Nessie Inc" example question of valuation of Type 3 acquisition (BPP Text)!

  • This topic has 0 replies, 1 voice, and was last updated 9 years ago by Binh.
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  • April 4, 2016 at 6:20 am #308947
    Binh
    Member
    • Topics: 41
    • Replies: 78
    • ☆☆

    Dear our friends,

    I have done the example of valuation of Type 3 acquisition (“Nessie Inc”) in BPP Text book (page 327, 328 with version 2015-2016). In this question, they said that all old debt’s interest of Nessie (the acquirer) would be reduced from 7.5%s to 7%. Post-tax projected CFs of Nessie in future are provided.

    The problem is: if the interest rate reduced, then IMO there was tax effect on the post tax operating CFs as follows:
    + Pre-acquire: Operation CF post tax = EBIT – Tax (pre)
    + Post-acquire: Operation CF post tax = EBIT – Tax (post) (tax(post) = tax(pre) + reduction in interest x tax rate).
    + Therefore, Pre-acquire CF = Post-acquire CF – reduction in interest x tax rate.

    But in the solution, they just combined the operating CFs (post-tax) of Nessie and Patsy (company to be purchased). Is it actually correct?

    Rgds,

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