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Hi,
For calculating Mlima co’s value without project Bahari,
I’m understand with the PV first four year of $131.6m, but not understand the PV after four year of $432.7m :
(47.6 x 1.035)/ (0.11-0.035) x (1.14)-4
is it relates to the phrase “after the four years, the annual growth rate of free cash flow to the company will be 3.5%, for the foreseeable future” ?
Could you explain the calculations for the PV after four years?Thank you.
Because after 4 years there is constant growth, we can use the dividend growth formula from the formula sheet. (Usually we use the formula on dividends, and it give the market value of a share, but you can use the same formula to value any stream where there is constant growth).
47.6 is the equivalent go Do in the formula; 3.5% is g; and 11% is the discount rate (the equivalent of re in the formula).
The only problem is that instead of the growth starting immediately, it only starts in 4 years time. So the formula gives a PV in 4 years time and therefore we then need to discount by 4 years at 11% (which is the 1.11^-4)
(You mistyped the last bit of the expression – it is 1.11 not 1.14)DEAR SIR,
IN JUNE 2013 question 2 HAV CO. why the answer for part iii) cash and share exchange specifically does not include synergy benefits of 140m from acquisition. Moreover sir I did the following working and got just 17.6%
TOTAL EARNINGS AFTER TAX INC.SYNERGY BENEFITS=140 + (1980+397*.80)= 2041.6M
NEW SHARES IN COMBINED COMPANY=(1/2*1200)+2400=3000SHARES
THEREFORE EPS= 0.681
SHARE PRICE IN COMBINED COMPANY WITH P/E RATIO OF 14.5 OF COMBINED COMPANY= $9.87PER SHARE
ADDING IN CASH OFFER OF 1.33 GIVES TOTAL OF 11.20 PER SHARE
HENCE INCREASE IS (1*11.20/2*4.76)= 17.6%
Please point out the issues in the working.ThankyouThe premium used in the calculations does include the synergy benefits (in the workings for part (b))
Part (c) asks for the premium that Strand’s shareholders will received. For (i) and (iii) the problem does not arise. For (ii) the answers uses the current market value of Hay’s shares – it is only later that the share price will change, and the answers does state that it will likely change.
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Dear sir
could you please clarify why in the Q01: the tax benefit on capital allowance was not cnsidered while calculating the free cashflow.Strictly it should have been there, but the problem is that we don’t know how capital allowances are given.
However it would have been a good point to mention in your report.Dear Sir,
In the answer of Q1 part (iii) – calculation of value of company, the free cash flows of first 4 years are the operating profit. However, the operating profit is the EBIT, therefore free cash flows at least should be EBIT + depreciation. But the question does not provide depreciation there! I am confused at this point!
Have you watched my free lectures working through this question? (because I think you will find that it answers your query).
You can find it by going to the main P4 page and following the link to “P4 Revision and Past Questions”.
The question here is Q1 of June 2013 but the revision parts are about D13, J14 and D14 sir?
Oops – sorry 🙁
I was sure that the answer to this question had been uploaded.Under the heading “Mlima Co, financial information” in the question, it says that “….the current tax-allowable depreciation is equivalent to the amount of investment needed to maintain the current level of operations”.
So although the depreciation itself is not a cash flow (and therefore on its own added back), the same amount is a cash outflow for the new investment to maintain operations (and therefore needs subtracting).
So the net effect of adding back and then subtracting the same amount is the same as just ignoring it.(This is something that the current examiner does quite regularly.)
Thank you sir, I did not notice that point, it is quite tricky to my mind! A respect to that current examiner’s brain!!! 🙂
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