Vogel Co – June 2014 Question 3

VValeiya5y ago

Dear John, Please advise how understand when FCF or FCFE we should apply? If Debt is on balance - we should evaluate MVe - hence use FCFE and ke? If Debt is not on balance - we should evaluate MV total value - hence use FCF and cost of capital? MVe can be also calculated as market share price * q-ty of shares? 1) In Vogel case debt on balance Ndege Co - MVe should be calculated as MV total value (FCF) with cost of capital - MVd? 2) Add: present value of cash flows from year 2 onwards: ($9·14m x 1·052)/(0·1 – 0·052) x 1·1^–1 = $182·11m If it from second you should not we use ^-2? Thanks in advance.

John MoffatTutor5y ago#1

Discounting the FCF at the WACC gives the total MV of the business (equity + debt). Discounting the FCFE at the cost of equity gives the MV of the equity. The gain resulting always 'belongs' to the shareholders. How this gain is 'shared' between the existing shareholders and the shareholders of the company being acquired depends on the premium paid to the shareholder in the target company.

VValeiya5y ago#2

Sir, Sorry but I don't get it. If total MV is MV of the business, why Value to shareholders of Ndege Co (MVe) = $150·42m is calculated (Total MV less debt). The value of business is more appropriate, isn't it? I've got problems with identifying in which cases we should calculate MV total value (FCF) or MV equity (FCFE). And could you please answer on question #2 please? Thank you.

John MoffatTutor5y ago#3

Although the value of the business does increase, the debt is repaid (not (ii) in the question) and so only the remainder goes to the shareholders. As to whether to use FCF or FCFE depends on what information is given and what the question asks for. As far as your second question is concerned, the formula gives the PV 'now' if the first flow is in 1 years time. Here the first flow is in 2 years time which is 1 year laters, and so the PV from the formula is 1 year later also and is in 1 years time. To get to the PV now we therefore need to discount the result for one year.