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Value created from spinning off Department B into Ndege Co
Free cash flow of Ndege Co $ million
Current share of PBDIT (0.4 × $37.4m) 14.96
Less: attributable to Department C (10%) (1.50)
Less: tax allowable depreciation (0.4 × 98.2 × 0.10) (3.93)
Profits before tax 9.53
Tax (20%) (1.91)
Free cash flows 7.62
Why they have not deducted interest in question
Value created from combined company
($126.56m + 0.5 × $23.0m × 0.8 + $7m) × 10.35 = $1,477.57
why even synergy is multiplied by pe ratio ?
We never subtract interest in arriving at the free cash flow because discounting it at the WACC is accounting for the interest. To subtract it from the free cash flow would be accounting for it twice. (We only subtract the interest if we are getting the free cash flow to equity.)
The PE ratio is applied to the total earnings of the combined company. The synergy benefit is extra earnings.