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In calculation of FCF of NDEGE CO
Where does $9.14m came from when computing PV of cash flows from year 2 onwards.The question says that in the first year the FCF will grow by 20%,
7.63 + 20% = 9.14
Hello sir,
In the same question, answer shows present value of year 2 onwards as 182.11 and after the statement “less debt 40m”, it shows the value to ndege shareholders as 150.42How is this possible? As 182.11-40 should be 142 right?
You are not reading carefully!
It actually says: PV of year 1 cash flow 8.31; add PV of year 2 onwards 182.11; less debt 40.
Now it should work!!
Dear Sir, In the same ques they are combining the values of dept A,B,C….if dept B is to b spun off wts the logic behind adding “dept B’s value? “and deducting indvidual companies’ value for calculating the premium. Is it vogel company wil stil have to pay to depart Bs shareholders for acquring tori? Thank u
Dear John,
In the same question, why calculate the FCF of Ndege, the answer do not add back the tax allowable depreciation, pls. adviseThe only people being paid will be the existing shareholder of Tori (and they will expect to receive a premium on their share price.
If it was not for all the extra information (and the idea of selling C and spinning of B) then the value of the company after the acquisition would simply be the total of the two companies values added together.
Because of all the extra information, the new value of Vogel is higher and so this extra value is the maximum premium that they could afford to give Tori’s shareholders.
The reason the tax-allowable depreciation has not been added back is because of note (vi) in the question where it started that it can be assumed that the amount of depreciation is the same as the amount needed to maintain operations. So although strictly the depreciation should be added back (as not being a cash flow) we then need an extra cash outflow of the same amount to maintain operations – so instead of adding back and then subtracting the same amount it is easier to do neither 🙂
1.As Tori consists of A,B n C by existing shareholders do u mean shareholders of dept B as well ? Coz this dept is being spun off n the shareholders of the new company wil remain the same. 2. Vogel is 1st aquiring tori with all its depts n after that B wil b spun off n C sold. Is it? If nt plz calrify me the concept provided im comfortable wid the calculations in this ques Thanks 🙂
B does not have its own shareholders – it is part of Tori.
What you say is correct. Vogel is going to buy all of Tori. Then it is going to close one of the divisions and spin off another one.
@johnmoffat said:
The reason the tax-allowable depreciation has not been added back is because of note (vi) in the question where it started that it can be assumed that the amount of depreciation is the same as the amount needed to maintain operations. So although strictly the depreciation should be added back (as not being a cash flow) we then need an extra cash outflow of the same amount to maintain operations – so instead of adding back and then subtracting the same amount it is easier to do neither 🙂
So whenever the question mention the same assumption, we do not need to add back the depreciation, is it right ?, pls. help to clarify, John
Hello sir,
I just wanted to clear the following:
When the examiner mentions “it can be assumed that the amount of depreciation is the same as the amount needed to maintain operations.” We must subtract the tax allowable depreciation right?
Im confused because i dont understand what you mean by instead of adding back and subtracting the same amount it is easier to do neither.
So can you please show how to get the answer 7.62.Thank you sir!
Normally we subtract the depreciation in order to get the taxable profit and hence the tax payable. Then we add back the depreciation because it is not a cash flow.
As a separate item, we need to subtract the amount needed to maintain operations, because that is a cash flow.
Although strictly we should be adding back the depreciation and then subtracting the amount to maintain operations, since the two are the same amount then the net effect is zero.
B is being spun off. B is 40% of Tori’s PBDIT, so 40% X 37.4 = 14.96. 10% of B’s sales go to C which is being closed, so we need to subtract 10% x 14.96 = 1.50
40% of Tori’s non-current assets relate to B, so the tax allowable depreciation is 10% x 40% x 98.2 = 3.93. Tax is 20% of the resulting taxable profit.
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