Opao Co, Dec 2018

I don't understand you. Where are we calculating the terminal value??

We are calculating the MV of Tai Co pre acquisition where we get the free cash flows of $1399.51 (after taking into account the growth of 3% for the forseeable future. Why are we not discounting this to the present value using the cost of capital? I had another question, in the answer when they discuss which offer is to be taken they mention about 12%: Opao Co’s shareholders benefit less from the acquisition compared to Tai Co’s shareholders. In each case, they get less than the additional value created of 12%, with the cash payment offering the highest return of 11·2%, which is just below the 12% overall return. How are they getting the 12%?

$1,399.51 is the present value. When we calculate the PV of an inflating perpetuity (as is the case here) we use the dividend growth formula as I explain in my free lectures. Using this formula gives the present value. Prior to the acquisition the total value of the two companies is 5,000 + 1,000 = 6,000. After the acquisition, the total value of the combined company is 6,720. So the overall return is 720/6,000 = 12%

Thank you so much! One question, when we use the multi growth model, growth is different for first few years but same for 5 years an onward, why do we then discount it to present value?

We need the present value of all future flows, whether they are growing at the same rate or at different rates in the future.

Thank you!

You are welcome.