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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