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Dear John,
Ideally when we calculate addtional valu attributable to the acquirer, we do as follows:
value of combined company – value of both companies before acquisition – premium paid.And the values that we take usually is the euity value of companies and not the firm value.
However, in the question Pursuit Co., they have valued the firm using FCF firm (as asked in the question), but why didn’t they then deduct the debt value from firm value to arrive at equity value? Why have they done the additonal value to acquirer calculations based on firm values and not equity values?
Furthermore, they have stated that $52K is net benefit attributable to Pursuit’s shareholders, which I think is wrong because if we are using firm value instead of equity, then this 52k must be attriutable to not just shareholders but to all investors, isn’t it?
The equity value is not needed because we know the increase in value of the firm and we know the premium payable for the acquisition and therefore we know the benefit resulting.
Any gain only ever goes to the equity. There will be no affect on the debt lenders who continue to get fixed interest.
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