[naveez]

Sir One quick question!

Is it right if I C/F the Year 1 loss and set it off against Y2 and Y3 profits?

Will the examiner reward me the full marks even if I do state the assumption? Pls advise.

Thanking you in advance for your kind explanation.

[naveez]

Another one more question!

It was said that, the CF of the manufacturing business unit will only increase by 8% in the first year and then it remains static for the foreseeable future. So therefore, we didn’t incorporate the growth rate as the denominator into the formula to calculate the value of the manufacturing division.

But let say just for the sake of argument, if the the CF were to grow by 8% for the next 4 years and then it remains constant for the foreseeable future. Then how do we compute the value of the manufacturing division,
Should we incorporate the growth rate into the formula as the denominator?
Should we discount the CF at the Y4 discount rate of 10%?

[naveez]

It should be the total equity value both the companies right not the total MV(which is equity+ debt)?
Thank you in advance for your explanation! Have a good day!

[naveez]

So in order to calculate the overall Beta asset of the combined company, we first take the individual asset beta of each company and multiply with equity finance( because it is equity finance that carries the business risk) proportion for each company.

This scenario is somewhat similar to the asset beta computation of the component division in the Question:TISA Co ( June 2012/ BPP 14). Am I right?

Pls correct me if my understanding on above is incorrect?

Thanking you in advance for your explanation.

[naveez]

Sir, let’s say just for the sake of argument, If Louieed Co’s P/E ratio were to change after the acquisition, then to calculate the value of the combined entity we apply NEW P/E to the new earnings right?
i.e. If the we the shareholders of Tidded Co accepts cash offer,
NEW P/E ratio – 16 [ answer derived from part (b)]
NEW Total Earnings – $326.8m [ answer derived from part (c)]

then the total value of the combined entity would be = $5228.8m ( 16x $326.8m )

Sir pls correct me if my understanding on above is incorrect?

Have a good day!

[naveez]

Now I clearly understood Sir! Thanks once again for your explanation.

[naveez]

“Because the question says that Tisa’s capital structure is unlikely to change following the investment.”

Sir,

Lets say, just for the sake of argument, if Tisa’s capital structure changes following the investment process, then what do we do? Pls Advise.

Thank you in advance for your explanation

[naveez]

Sir, Let’s say if we’re borrowing then we having to “Sell Call Option”s”Right?
Then how do we account for? Pls Advise!

[naveez]

Now again, I am finding myself scratching my head and finding difficult this.
Sir, could you please enligten me on this!

SELL put
Exercise Price: 3.5% (96.50)
Future Price : 4.26% (95.74)

Why are we exercising PUT OPTION(sell) here, as the future rate seems to be higher? Since we are depositing we’re supposed to seek for higher rates right?

Thank you in advance for your explanation sir!

[naveez]

Sir,

Let’s say, just for the sake of argument, if we’re borrowing we would want to limit the maximum rate(cap) so we will buy put option with an exercise price of 96.50 and if want to to create a collar, we should sell call option with an exercise price of 97.00 in order to limit the minimum rate(floor).

Hope I am making sense here, kindly correct me if otherwise.

[naveez]

Thanks sir for your explanation. Appreciated

[naveez]

Let’s say if I exclude the working capital amount, what plausible assumption that I should state for this exclusion. Pls advise.

[naveez]

Sir can we also use 3.350 as the annuity factor for 4 years at 7.5%( the company’s current borrowing rate) for both the computation of PV tax savings from loan interest and Subsidiy benefit? If so, what assumption that I should state.
Pls advise.

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