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Hi, I have a number of queries re this question:
1. Why is the interest on the 40m bond that was transferred to Ndege Co not being deducted when calculating FCF for the new company?
2. In calculating the value of Ndege Co, why was the PV of y1 cashflows (8.31m) not added to the value in perpetuity? I calculated (7.62*1.2)*1/1.1^1 + 9.14*(1.052/(0.1-0.052)*1/1.1^2
3. When calculating FCFE, debt is never deducted when calculating the value. Why is the 40m deducted here? Is that the difference between free cashflow to firm & FCFE?
4. In calculating the value created from combined company, why the is current value of Tori being used? I used the practice of:
(Total value of companies pre-acq) – (value of combined + synergies) = value created
Thanks
1 & 3
You are confusing the two. FCF is free cash flow to the firm and is the total available for both shareholders and debt lenders. We therefore do not subtract debt interest in arriving at it.
FCFE is the free cash flow to equity and for this we do subtract the interest so as to arrive at the amount available for shareholders.
Have you watched my free lectures on this?
2 I don’t know which answer you are looking at, but the examiners answer does add the two together.
4. The value created is the value of the ‘enlarged’ company post acquisition less the total of the two values pre-acquisition. (Synergy is the main reason for there being value created)
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