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In Pursuit 6/11
We use the cost of equity and cost of debt of Fodder (company being acquired) to calculate its valuation based on past years cash flows and we also calculate the combined asset beta of the two companies to calculate the post acquisition present value of the combined company – This I get it makes perfect sense, use one company’s cost of debt and equity to calculate its WACC and its present value based on past cash flows.In Laceto 6/01,
We use the cost of equity of Omnigen but the cost of debt of Laceto to calculate the value of Omingen based on its future cash flows, if we were given info about Omnigen such that we could calculate their Cost of Debt would be using that instead ? Do we only use Lacetos Cost of Debt since the two companies have a similar debt structure ?To value the combined company you should use the new WACC of the combined company based on the cost of equity, the cost of debt and the gearing of the combined company. (The cost of equity being calculated by combining the asset betas and then using the gearing ratio of the combined company to calculate the equity beta)
This is what has been done in the answer to Pursuit – they have used 6.4% as the cost of debt, which according to the question is what it is expected to be for the combined company.
As regards Laceto, they have taken exactly the same approach – used Laceto’s cost of equity, cost of debt, and gearing (after acquiring) to value the combined company. The only thing is that they have been forced to assume (as the answer says) that Laceto’s cost of debt does not change after the acquisition.
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