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In case of combined co value they have calculated by multiplying the combined FCFE by cashflow multiple can we not find combined co value by pre acquistion value of buyer+ pre acquisition value of seller+ synergy benefits ….
I have some doubts in theory part b what do they mean by reliability of synergy estimates and what does operational synergy mean and how it can ne achieved related to scenario
In general terms you could calculate it that way, but not here because there are synergy benefits due to the fact that the PE ratio changes. Although it remains unchanged for Selorne at 8, this now applies to Chawon’s free cash flows and currently it is less than 8 for Chawon.
This actually explains what you are asking in the second part of your question. Synergy occurs partly because the cash flows of the combined company is higher than the total cash flows of the two companies individually (due to costs savings etc) – this is operational synergy. However it also occurs because the level of risk changes which is why the PE of Chawon changes – this on its own can result in a higher value for the combined company.
hi sir, in the calculation to find total cash flow to equity, why we do not take into account the annual growth of 7million of FCFe of Chawon?? It is because the annual growth only happen when Chawon does not combined with Selorn??
Sorry – I did reply but for some reason my reply seems to have disappeared 🙁
It is because after the takeover we are using a PE valuation, and PE valuations use the current earnings. (The PE itself takes account of whatever growth is expected in the combined company).
BTW sirr, just to clarified , do you means that the growth of 3% is already included in the P/E ratio?? or because of the p/e ratio it self does not included any 3% growth we dont include it???
If shareholders expect higher growth then the PE ratio will be higher.
So the PE ratio effectively takes account of the expected growth and is applied just to the current earnings.
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