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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Westparley Co (Mar 20)
Hi John, my doubt in this question are:
1)
In calculating the PV of foreseeable growth the growth formula would be 4th year*(1+g)/(Ke-g)
But they have taken the WACC % instead of Ke %, why?
2)
In additional value created to Westparley Co’s shareholders, they have done (PV of FCF + PV of synergy + sale of Matravers Tech) – (MVe + Mvd of Matravers)
But isn’t the additional value created from the acquisition be (Combined company value – Total value of Westparley Co – Total value of Matravers Tech) – premium payable
1. If in the formula we use the free cash flows to equity (i.e. dividends) and use the cost of equity, then the answer is the market value of the equity (i.e. the PV of future dividends discounted at the cost of equity)
However the formula can be used for any growing perpetuity. Here we are using the free cash flows to the firm and using the WACC and the answer is the market value of the firm (equity plus debt) (i.e. the PV of the free cash flows discounted at the cost of capital).
I do actually explain this in my free lectures.
2. The new company value has been calculated without the proceeds from the sell-off and the synergies, and so these need adding. To get the value of Westp[arly shareholders we subtract that amount paid to Maltravers which including the premium is 14,375,