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I am currently going through the Example 2 of the above chapter.
I have a question regarding the answer. As said in the notes to arrive at cash flows, we need to add the cash flows of separate companies plus any synergies expected. For example, in the year 1 the projected cash flows of Nairobi is 20, of Delhi is 8 and the synergy is 10, The total is 20+8+10 = 38. In your answer is 35. Similar differences are in year 2 to 5 as well. I do not know where the differences are coming from.
Second question, in your answer you wrote that shareholders of Nairobi will gain 4 if the acquisition goes ahead. I am not sure where this 4 is coming from.
Could you please explain?The synergistic amount of 10 is assumed to be before tax – there is tax of 30% and so it is 7 after tax.
With regard to your second question, it is a typing error which I will have corrected. The gain is 7 ( 177 – 170)
Thank you very much!
So should we always assumed that this sinergetic amount will be given pre tax if no specific information be given?Yes – that is most likely the case in practice. (Although in the exam it will probably be made clear anyway).
Also, in the exam, always state your assumptions – provided your assumptions are sensible you will still get the marks even if your solution is different from that of the examiners.
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