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Hi
Please assist me if you can
I am using the BPP Revision kit and looking and am having difficulty with qn 43. It’s a valuation of a company question.
When we calculating the valuation of the company for the acquirer and the target co the formula used is Nopat -net reinvestment /WACC-g
For both cos they have multiplied Nopat by 1.05 and 1.04 respectively. Any idea why? What net reinvestment are they actually referring too?
Also they have adjusted the value for the shares and the pension fund scheme. Pls explain why this is
If anyone has done this question, it’s also a question in dec 2007 paper pls would u explain.
Much appreciated
Anisa
They have used the growth model formula (it works for any stream with contact growth). The 1.04 and 1.05 are for the growth rates given in the question for each company of 4% and 5%.
Free cash flow is always NOPAT – net reinvestment (the investment in non-current assets necessary to maintain the business). The figures for (NOPAT – net reinvestment) are given in the question.
With regard to the options and the pension fund scheme, the requirement specifically says that these are to be taken into account.
(In future, please give the name of the question – I do not have the BBP Revision Kit because I do not work for BPP. Also, if you want me to answer, then ask in the Ask the Tutor Forum.)
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