This content provides a detailed walkthrough of a complex business case study, focusing on strategic decision-making regarding acquisitions, valuation methodologies, and regulatory principles in corporate finance. It emphasizes a structured approach to problem-solving and report writing in strategic business exams.
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Now we understand the requirements
and it looks so exciting. You should be
looking forward to read the question now
and this is how you should approach your
exams. The way to do well is please go
look at the requirement first. It will
raise your curiosity and makes you look
forward to reading the story because
actually a story an interesting story.
Every exam question is an interesting
story. Yeah. So let's look at this nice story.
So I believe you've all gone through
this quickly. So when I just breeze
through the question,
it should be easy for you to follow through.
Yeah. So you have chip pay.
So market value of equity. So I'm just
going to start listing those things. So
of equity please pay attention.
Yeah. Not market value of chickp. Market
value of equity of chickp. Market value
of a company is totally different from
the market value of the equity. Market
value of equity is the market value to
the shareholders. Whereas the market
value of the company is the value to all
the capital providers and you already
know that capital provider is either an
equity provider or debt provider. So
when you have both of them we are
talking about the market value of the
company but if it's shareholders then
that is market value of equity. Thank
you. Yeah. So they gave us that to be
12600 million. Yeah. So just let's just
note that down cuz all the important
information you need to note it down.
Yeah, the debt ratio, debt equity ratio
was given as well 3070.
We have that that is still talking about uh
the company developed that that yeah
don't seen all that. So there's a recent
meeting yeah where they're looking at um
company need to change it current
strategy of growing organically. So
they've been growing organically. Now
they want to consider acquisition. Yeah.
What are the benefits of acquisition
over organic growth? Quickly remember
I'm not just going to focus on just
answering this question alone. I'm just
also going to use it to do a bit of
revision on some of the concept that I
can see quickly. [clears throat] What
are the benefits of growing
acquisition over organic growth?
It will grow at a faster rate.
>> Faster rate. Fantastic.
Faster rate. That That's one of the
>> Help new R&D to add to your existing stock.
stock.
>> Yeah. Fantastic. You might be able to
actually get some additional
additional
synergy that you won't have internally.
And that might involve you getting some
R&D benefit or some product pipelines or
even capacity that you don't have. Yeah.
Experties that you don't have
internally. Nice. So they want to do
that. They want to acquire. They don't
want they want to stop growing
organically. Now look at these
directors. This is where it now start
getting interesting because remember the
first question actually want us to
discuss what director A and director B
are talking about. Right? So now let's
look at what they're talking about. So
director A was the of the opinion that
Chikipe should follow a strategy of
acquiring companies in different
business sectors.
She suggested that focusing on just the
pharmaceutical sector was too risky and
acquiring companies in different
business sectors reduce the risk.
So this risk management yes that what
they are talking about director A what
approach of risk management is director
A talking about
So already we we have the idea that's
what A is talking about. What about
director B? Let's look at what director
B is talking about.
Director B was the opinion that director
A suggestion would not result in a
reduction in risk of shareholders. In
fact, it suggested that this would
result in agency related issues with Chikipe
Chikipe
shareholders reacting exly and as a
result the company's share price will
fall. Instead B suggested that Chikip
should focus on its current business and
acquire other established pharmaceutical
companies. In this way, the company will
gain synergy benefits and thereby
increase value of its shareholders.
>> Oh, this is uh this is horizontal
expansion, right? Fantastic. That is
Thank you very much. Smile
and you can see as as long as the
question is looking it's not looking
even too easy already.
Those are the two things you want to discuss
discuss
Now what do we need to say? There's no
more that we need to pick from A and B.
These are the two things we need to talk
about. So once you have been able to
identify this, [clears throat] remember
you are a professional student, you are
a strategic paper, right? So you don't
just write in a scattered manner. You
have to write properly and a structured
way. Even your thinking has to be
structured. And that's how you're going
to earn all your mark your marks. So
you've identified the method. So that's
that will be your starting point to say
director A is talking about
diversification. And once you mention
diversification, the next thing you need
to do is you put a definition. What is diversification?
What does it mean to diversify? So when
you're diversifying, all you are doing
is just investing in different sectors
to reduce your risk. Yeah. So your
portfolio is not concentrated. Those are
the things you'll be saying. Yeah. So
definition you deal with it which is
talking about what it is. Then once
you've dealt with definition then you
need to check for appropriateness. Yeah.
So you're talking of appropriateness of
method. So you need to be thinking how
do I structure my response. You don't
just write like I just want to write. No
appropriate when is it appropriate? When
is diversification appropriate? You need
to talk about it because when you know
when is appropriate then you can now
go to the next which is about relevance
Remember we said this is only appropriate
appropriate
when shareholders or investors, let me
uh exposed to what type of risk,
systematic or unsistatic risk?
Unsistatic. Actually
remember systematic risk you cannot diversify.
diversify.
Yeah. That is your business that that is
not your business. That is you remember
now. Yeah, that's your beta. That's why
you get rewarded for systematic risk
with your beta. But unsistatic risk is
your concentration risk. So you only use
diversification when investors are
exposed to unsistatic risk. That is they
Now remember I'm not going to be writing
all stories in this class because if I
have to do that I'm not going to solve
even one question in four hours. So I'm
giving you all the key points. What I
expect you to do after this class again
is for you to sit down and do a write up
properly based on those key things that
I'm mentioning here. [snorts] Right? So
you know when it is suitable now
concentrated portfolio exposure to
systematic risk. Yeah. then diversion
will make sense. Now looking at this case,
case,
can someone tell me would this be
relevant to this guy the shareholders of
the Chikipe? Would diversification help them?
them?
If you look at the question, do you think
think
that's a problem for them?
So now let's look at who will
diversification actually benefit.
Remember the diversification is not for
the company but rather for the shareholders.
shareholders.
Shareholders are the company. They are
the owner of the company. So they
already have this pharmaceutical
company. The question is should they
diversify? Which means should this
company invest in a different company so
that the shareholders can benefit.
How do you decide on this? You need to
first of all understand the nature of
the shareholders that we are talking
about. Yeah. And if you look at the
nature of the shareholders, they clearly
told us they said Chikipe is a large
listed company operating in the
pharmaceutical industry that is Chikipe.
But what about the shareholders of Chikipe?
Chikipe?
They said insurance investors hold most
of its equity shares. So which means
that the owners of Chikipe are
institutional investors
and what does this mean? This makes a
lot of difference. The fact that they
institutional investors and what it
means is that these are really
professionals in the investment space.
These are experts. These are experienced people.
people.
You never will expect these instrumental
investors to hold concentrated
portfolio. Never. Even high will not
hold a concentrated portfolio. Though
individuals can hold because some
individuals might not even have the
knowledge because they are just
investing. But when you're talking about
institutional investors, the least thing
that you expect them to do is to have a
diversified portfolio.
So because
the owners, the shareholders are
to hold diversified
diversified
portfolio already. So GK will just be
one out of thousands of investments that
they dealing with. And in that case
will not help.
Diversation will not be expected to give
so much value.
So when you are writing don't be
definite like I always tell you don't be
definitive just try and use might might.
Don't be very certain the way you write.
So diction might not yield
so much benefit.
The same way that I've dealt with
diversation, I'm going to talk about
horizontal integration as well. Yeah,
which means
I'm going to bring this three down as well.
well.
M&A between
When is it appropriate for companies to
use? When do you think a company should
Right. So this is appropriate when
companies are targeting synergy.
synergy.
Yeah. And that synergy can be either
cost energy, can be revenue, can be financial.
Yeah. Usually when you going to within I
mean your business area
sort of you're trying to also want to
minimize the risk of failure because
it's an environment is an industry that
you're already familiar with an
operation you are familiar with all you
are just looking for is synergy. Yeah. So
So
for this case, is this something that
will be relevant? Is this something that
you think might be good for JK?
Definitely relevant by all means is way
to go because there's a lot of benefits.
And if you look at
if you look at the question, the
question even ask us to list out those benefits.
benefits.
I'm just showing you that you don't just
go straight and listen the benefit you
need to have that discussion that I've
just mentioned. Yeah.
Before you go into look at the question
said discuss A and B and the types of
benefit which may arise from the
acquisition. So so a lot of benefits and
uh we need to list some of those benefit
>> they'll be able to gain pricing power.
So pricing power might increase. Okay. >> Competition
>> Competition
>> might increase.
I'll match that because
of reduced
competition because they in the same
operation. Fantastic one. What else? At
least you should be able to mention
three or four. I would also say that we
can share uh skills and work together.
>> Fantastic. Econ anytime. In fact, that's
the first thing that must always come to
your mind. Anytime you see horizontal
integration, economies of scale will
always be there because we are in the
same operation. Why do we need to have
the same finance division? Why do we
have to have two um admin? Why do we
have to have two legal department? We
can merge all of that together and fire
some people and get some some savings on
admin. Likewise, if we are using the
same system, the same process, the same
raw materials, it means that we're going
to be order raw material that's almost
double of what we used to order. And if
negotiate more B book B purchase discount.
discount. Yeah,
Yeah,
we can also reduce departmental sizes.
Yeah, merge department and all of that
and you get economies of scale from that
because it's the same process. We don't
need new skills. We don't need new raw
material. It's just same thing. Okay.
What else? What are benefits? There was
one I showed you. Now, the fact that
these guys have fewer products and those
other ones are growing faster, it means
that there's a leverage there, which is
the opportunity for products, opportunity
opportunity
to increase
products output.
Yeah. And likewise even the for sure can
get remember [clears throat] it's
Yeah.
Because it's good to be able to pick
your response that are quite relevant to
the case as well. [snorts]
Remember you're not going to write in
bullet points like this. I'm just
putting the key point you need to put in
your write up for you. So take for
instance what you can write for an
example can be something like the
director A discussion is centered around
a method of managing risk called
diversification. Diversification
involves investment in different sectors
to reduce the risk exposure. Whereas
director B is looking at horizontal
integration which requires mergers and
acquisition between companies with
similar operations. Looking at director
A, diversification is only appropriate
if investors are exposed to unsistatic
risk that is investors are holding
portfolios that are concentrated in one
sector. However, looking at this case of
Chikipe or Chikapa, their shareholders
are mainly institutional investors which
are expected to understand investment
strategy. At the minimum, these
investors would have managed their
concentration risks by diversification
on their own and Chikipe would not have
to diversify to help them reduce their
investment risk exposure.
That is how you're going to be writing.
Discuss how using real options
methodology in conjunction with the net
present value could help establish a
more accurate estimate of potential
value of companies as suggested by
director C. So let's look at director C.
What is director C talking about?
Director C agreed with director B, but
suggested that CHKO should consider
relatively new pharmaceutical companies,
new ones.
I don't know why, but we'll find out. As
well as established businesses. Okay.
Likewise, established ones.
In our opinion, newer companies might be
involved in research and development of
innovative products which could have
high potential in the future. She
suggested that using real options
methodology with traditional investment
appraisal methods such as NPV could help
establish a more accurate estimate of
the potential value of such companies.
This one is just the methodology that considers
flexibility. Let me not repeat option
again. Remember I always tell you option
in project. Yeah. So and you should give
an give some examples
of those flexibilities.
You can have a delay option. You can
have expansion option to expand or to
even [clears throat] abandon.
abandon. Right.
Right.
All of this comes with a value
and that's what option methodology does
for you. So option methodology values this.
this. So
So
so it values
Yeah. Which is what you won't find under
the traditional method. Yeah. If I put
um traditional method here, your
traditional NPV
and option methodology here that's what
you want to discuss. Yeah. Real option
methodology will consider flexibility in
project. This one does not.
Yeah. So values those flexibility
and the total value of project is the
NPV plus the options plus the option value.
So in what we are saying is that
because your normal NPV will just do your
your
cash flows. Plot the cash flows and
calculate MPV. If it is negative, don't
do it. If it's positive, do it.
Sometimes NPV can be negative, but by
the time you add the option value to it,
the total value becomes positive. And
that's a good investment. So you can
actually lose a good investment if you
focus on traditional NPV alone. Yeah. So
what we are saying is that this consider
both intrinsic
that's the normal NPV intrinsic and the
whereas your NPV alone is just looking
Yeah. So which means
we have a full value like I said this is
a full value
and this is if you use this method is ra
not full value because it's only looking
at increasing value. Yeah.
So in terms of decision
which one will give a better decision
better. Yeah because considered full
no.
So this is [clears throat] better but
it's assumes
on now
now
or never basis. is
he doesn't understand flexibility.
Yeah. He just believes that once is once
you decide to do an investment just
start computing the cash flows and if
you don't want to do it don't bother. If
you want to do it do the cash flow
whereas that's not the reality.
Sometimes you want to do an investment
but you have that flexibility to say I
will not do it now I'll do it in 5 years
time or I would do it now but I can
expand it again in 5 years time. When
you do your traditional method all the
cash flow are just discounted as if they
are rigid no flexibility and that's why
your real option methodologies
is usually the better and that is the
comparison that they want you to discuss
MP all these points must come out and
remember you need to write don't please
don't don't do a table like this you
need to write and write on your word
document one thing you need to note on
your on this paper is do calculation on
Excel. Do write ups on your word
document. If you have calculations you
need to reference on Excel, label your
calculation on Excel appendix 1 2 3 like
that. So that when you are writing on
what document you can make reference to
those calculations I mean A and B we've
not done any calculations. 12 marks
already gone. Now C is where calculation
will start as you can see. Now see they
want us to do a report. Yeah.
What I'm going to do with this quickly
is to give you a template which I always
talk about. Yeah. For your report and
it's important you use that template and
I will also advise you please write a report
report
and not just report in fact this all the
question I'm going to be solving today.
Make sure you go and solve them on your
Share it with someone you have a partner
you studying with. Share it with each
other and mark each other as to what you
think. Yeah. On those um response,
I want to believe you've seen that the
question is not as difficult as it looks.
looks.
And um I going to see now prepare a
report. Now we want to do a report.
Please note that anytime you are
preparing a report in this paper, there
are some
titles that must be present in your
report. The first one is your title. The
title itself of the report. That's
number one. You must have you must have
a title in your report. You must have
introduction paragraph.
Introduction or background. You can call
it whatever you want to call it. You
must have that.
You must have results.
Extremely important. Once you have
results, the next thing is to have conclusion.
conclusion.
And I'm leaving some spaces before I put
conclusion. And I'll tell you why again.
Does anybody know remember why I'm
leaving this before I put conclusion?
because we going to be discussing other factors.
factors.
>> Fantastic. That are specifically
requested by the question.
Those are the things that will form
other paragraphs. But these four
you must always have it. The other ones
depends on what the question is asking
for. You can see that this question here
is asking for three specific things.
Prepare a report for the this with this
estimate with this and that one two
three. So
C1 is just estimate which is just
calculation. Yeah. So that definitely I
can cover in my result
estimate of the equity value arising
from combination of for sure with CHK
equity value arising. Yeah. So
that's also results just figure I can
cover it in my results. I reference my
appendix for calculation. So I don't
have new I don't need new paragraph this
not a discussion but look at this three
this is a discussion
evaluate whether the acquisition of for
sure would be beneficial to chickpeas
shareholders. So there's a discussion I
of the acquisition that will be a
paragraph for me for sure
and discuss the limitations of the
valuation method. Then I have limitations
of
valuation method.
So I know so before you start writing
please make sure you know your
structure. So I can't start writing
until I know these are my six parag I
mean five paragraphs with title that I
want to write.
So and what is the title? Prepare the
title is always in the question. Prepare
a report for the board of director of
chik pico. So my title can easily just be
be report
report
on acquisition or on
>> So introduction paragraph what are you
going to be saying in introduction
paragraph? Very straightforward, very
easy. All you need to do here is just state
state
what the content of the report.
So let me just say to keep it simple, focus
focus
on the content
of the report.
And what is the content of the report
here? What you'll be saying is that this report
then covers what
or discusses whatever
whatever you want to use what is it
discussing the value of equity of for
sure the value arising from combining
for sure and chicken pay also it's going
to look at [clears throat and cough]
limitations for valuation method and
also the action benefit to GKP. That is
what the report covers and that is what
we're going to be talking about on introduction.
introduction. Simple
Simple
results. What is result? Result are your calculations.
That's what you're focusing on there. Calculations.
Calculations. Then
Then
maybe if you have some justifications,
yeah, maybe some explanations, you can
Yes, before you now go into
other part of the paragraph. So we've
dealt with these two, the title, the
introduction. I've told you what that is
going to be all about. Now let's look at
the result. So which means here the
result we need to cover the equity value.
So we need to calculate the because that
is something specifically requested for.
So we need to calculate the equity value of
of
Yeah, we need to calculate that in our results.
So let's look at the first one. What I
would do is um so we start our appendix.
This is the time you go to Excel and the
first one you know your calculation is
beginning. So that's your appendix one.
So for appendix one, we want to try and
determine the market value of equity of posture.
posture.
Very important that we're able to break
that down. And what information do we need?
They gave us information about forot here.
What approach do you think we need to
adopt to be able to get the value of for sure?
What valuation method do we need to use?
>> Free cash flows.
>> Free cash flow. Thank you. Appendix one.
All your all your appendix must have a
title. Well labor.
So the focus on a one is equity value of
of uh
So you could see it's labor.
Yeah. An approach we have said we're
going to use free cash flow method. So
which means
this approach requires us to be able to determine
determine the
the
free cash flow
from for sure.
When we know that free cash flow from
for sure then all we have to do is to
discount it with the cost of capital or
for sure and we will have the present
value which is the value of the firm.
And in the beginning of this class we
all agreed that the free cash flow from
the firm will only give us value of the
firm. But if you want to get the value
of the equity then we need to take out
the debt. We all agreed and we
understood that.
Now let's look at information we have.
For sure Co. is a non-listed
pharmaceutical company established 10
years ago. Initially yet grew rapidly
until money was taken out of it. Then it
started struggling. The current debt
equity ratio 6040. This high level of
gearing means that the company will find
it difficult to obtain funds to develop
its innovative product in the future.
They gave us financial information, current
current
revenue, profit before interest and tax,
interest tax, and profit after tax. We
are not interested in profit after tax.
What we are interested in is free cash
flow. In arriving at the profit before
interest and tax, for sure deducted tax,
alliable depreciation, and other
non-cash expenses totaling $112 million.
It requires a cash investment of this
amount in non-current asset and working
capital to continue its operations at
the current level.
3 years ago, for Co's profit after tax
was 83.3. That was 3 years ago. Now it's
91. Not doing badly. Maybe not just
growing as fast as we expect.
And this has been growing steadily to
their current level. For sure profit
before interest and tax and its cash
flows grew at the same growth rate as
well. So which means the growth rate
from 83 of profit after tax to 91 is the
same growth rate you expect the profit
before interest and tax and the cash
flows to grow.
And this growth rate will continue for
the foreseeable future if for co is not
acquired by chap they gave us a cost of
capital of forco
So which means
all we have to do here is to estimate
the for cash flows for the future.
Remember valuation is done based on your
potential not on what you already have.
Like I always say your value is what you
can hand in the future not what you have
already earned.
Your value is the present value of all
the future cash flows. So which means we
must be able to estimate all the future
cash flows of for sure from next year
till the end of life.
Interestingly, fortune does not have a
dead certificate. We don't know when
it's going to die. They said he's going
to grow for foreseeable future. So, you
already know that in valuation there are
two period that you must know. your the
and beyond that
beyond that can be definitive or can be
infinitive. In this case, beyond is perpetual
perpetual
for this guy. So, it's forever. Let's
look at the plan horizon is when you
expect your revenue to grow.
Yeah, before it becomes steady. But the
interesting part is for this guy, he
doesn't even have planning. So it's from
it's just steady growth forever. So this
is pretty easy for us. Yeah. But for
this guy, they told us that right from
the following year to it eternity
is just going to grow at a steady rate
and that rate will be the same rate the
profit grew 3 years ago to now. So which means
means
our dividend valuation model comes handy here.
here.
And what is that formula? That formula
told us that all we need to do is to get
the current cash flow.
Yeah. Then you multiply by 1
plus G.
Then you divide that by the cost of
capital minus G. I'm sure you remember
this dividend valuation model. It's the
same thing. Instead of using dividend O,
we just need cash flow O. So cash flow O
is our free cash flow, current free cash flow,
flow,
which we need to use this data to determine.
determine.
So how do we calculate our free cash
cash flow,
you always have to start with the P
PBIT. Remember
profit before interest and tax. that is
Uh profit before interest and tax is um
given to be 192.3.
Please another thing you need to note
here is that your taxes for valuation is
on PBIT because don't think you're going
to pay tax on profit before tax because
remember you are doing a valuation of
the firm. So you don't want any
financing information I always say it
all financing data out of it because you
are valuing the whole company as it
belongs to the capital providers. Yeah.
So you know tax they already told us tax
is at 20%.
So we know we're going to deduct that
tax also we need to deduct non-cash flow
items or adjust. Let me call it adjust
because might be deduct might be add. So
adjust for non-cash flow items
and the popular non-cash flow items that
>> Depreciation and all of that. Yeah. But
here they told us they said
he has deducted depreciation and other
non-cash expenses totally 112. What do
we do to that?
>> Do we add or we deduct?
then working capital adjustments.
Interestingly, because normally you
would do working capital before you go
to the investing. Yeah. But they already
measured for us here as well. And they
said there's a cash investment of 98
that needs to be done
in order to continue its operation at
the current level. So every year we
expect him to do.
So I'm going to go to investing now activity.
Please [clears throat] ask questions if
non current asset and working capital.
Do we deduct or we add this 98.2?
>> This is going to be deducted. Exactly
the doctor because we are actually
investing so we are spending money.
Any other cash flow item? No. Because
once we are looking at free cash flow to firm
firm
it's about operations and investing
financing is not relevant. So
okay. So we know our free cash flow for
current year. Now
this guy will help us out now to get our
value for the company. Okay, we don't
have growth rates.
Our growth rates we need to determine
the growth rates. What method do we use
for growth rates? Do we use godon or
average method? The information that we
>> remember they told us that
>> I think
>> go ahead
>> think average method since we have
present value and future value
>> okay because we have the [snorts] old we
have they've given us two values the
oldest value which is 8.33 profit after
tax and the current value 91 One, it's
not that you always have to use profit.
It's because the question has already
told us that the rate at which the
profit is growing is the same rate that
the cash flow will grow.
Yeah, they've told us. See, it's cash
will grow at the same growth rate as
well. They've told us. So that's why we
need to leverage on the way profit has
grown 3 years ago to 91 now. And
whatever growth rate that is is the same
growth rate that our cash will be
expected to go. And
is the same formula. If you struggle to
remember the formula, try and remember
this formula. Future value is equals to
present value into bracket 1 + r
raised to power n. That's the same
formula. This formula is very good
formula. You you can't joke with this
formula. All you need to think about is
feature for future value is always the
most recent value. Present value is the
very old value. Sorry. Yeah, present
value is the old value. R is your growth
rate that you're trying to get. So I'm
going to change this to G now. And N is
number of years of growth.
And that is why this is the formula
you're always using for your growth
rate. So if I put all of that here, then
I can easily know that my most recent
cash flow is 91. I'm going to divide by
the oldest, which is a 3.3. 3.3
3.3
and I need to deduct all of that minus one
>> I can get you're using three because the
question says 3 years ago right?
>> Yeah. Yeah. 3 years ago because 3 years
ago mean it must have grown three times.
So what year will be 3 years ago? Let's
say we in 2025. 3 years ago is 2022. So
it would have grown to 2023 1 one
growth. 2024 2 then 2025 3. Right?
So that's three growth. So three times.
And that's why we're using three in this
as n. [clears throat]
So we know our growth rate then we can
easily now apply this formula. So so
let's try it. So free cash flow current
free cash flow is this guy. We have to
multiply by 1 + g 1 + uh g is this guy.
Then all of that divided by our cost of
Yes. Thank you. You guys are spot on.
So, so now we know the value but that's
the firm value. That is the value of for
sure. But what is the market value of
his equity? What is equity value? They
already told us that
this company called for sure
has debt equity ratio of 6040. So which
mean debt is 60% equity is 40%. So that
is equals to 40% of that total firm value.
value. So
So
[snorts] Okay. So we know the equity
value of for so which is what we need in
our result.
Likewise, the other thing we need in our
result which we have identified is the
value of the combined company. So I can
appendix two is the value equity value.
See so I don't get it twisted.
entities.
That is the next thing that we need to
do because we look at the question that
is C2. Estimate the equity value arising
from the combining for sure.
And if you look at the information we
have as well, the information we have
requires us to this is the information
on the combined company.
Yeah. Let me just read go through it
quickly with you. I know you write it.
So once this action takes place, it is
predicted that the com the combined com
company's sales revenue will be 4200 in
the first year and its operating profit
margin always be 20%. After the first
year the sales revenue is expected to
grow at 7% per year for the following
three years. Now you'll see different
types of rise on here. Now that's a
planning horizon you are just saying.
[snorts] It is anticipated that after
the first four years the growth rate of
the combined company free cash flows
will be 5.6 per year. You can see
similar to what I just explained to you
not long ago. What they are saying now
is the first three years they grow like this.
Yeah. 7%
this growth.
But after 3 years,
so this is
3 years,
it will be growing.
But what happens after 3 years? It will
still grow but at a different rate,
The combined company's tax allowation is
expected to be equivalent to the amount
of investment needed to maintain the
you can see for the combined entity the
scenario is different.
However, as the company's sales revenue
increases over the 4-year period, the
combined company required an additional
investment in assets of $200 million in
the first year and then 0.64 per year
increase in sales revenue for the next 3
years. So, they gave us the expansion
cost here. So, there will be an
expansion cost here.
It can be assumed that the asset beta of
the combined company is the weighted
average of the individual company's
asset beta weighted in proportion of the
individual company's values equity. This
is extremely important to note because
usually it's a popular way to weight
asset beta using the mark the the firm
value the total value of the company.
But now the question is telling you
specifically how you should weight your
asset beta of the combined company. You
know when two companies come together
you cannot just say the the asset beta
of the combined company is the addition
of the two. No, that would be wrong. And
you can't take one of them as well. That
would be wrong as well. You have to wait
it. Yeah. And they've told us how to
weight it. Waiting is just similar to
calculating proportion and multiplying
by each other and add it together. Just
the same similar waiting you do for
work, right? I will do that with you. No
worries. So that will give us the beta
asset of the combined entity. And it can
also be assumed that the capital
structure of the combined company
remains at Chikipe's co structure which
is 3070. So the capital structure
remains 3070.
Chikap pay will pay interest on 5.3% per
year. So that's cost of capital when
they combine.
Now let's look at the combined entity.
Uh we've seen the revenue. They've given
us the information the growth of the
revenue has been given as well. So we
can actually start to plot year one.
Yeah. The 3 years that will be growth
for 3 years. So revenue
for year 1 is 4200
and this will go at uh it will grow at 7%
for 3 years. 1 2 3. Yeah. So that means
that will grow to year four.
Yeah. This is another tricky one. Don't
think because they said it will grow for
3 years then it will stop at year three.
These examiners they always have a way
to get you routed.
>> How do we how do we determine that?
>> Okay. So the question said at the first year
it is predicted that the combined
company sales revenue will be 4200 in
the first year. So you are definitely
sure that year one revenue is 4200.
Right? That one is clear.
Then now say after the first year that
is from here the sales revenue is
expected to grow at 7%
for the following 3 years. If three
years are following year one, when will
that stop? That is first group. [snorts] >> Second.
>> Second.
>> Yeah. Yeah. Yeah. Yeah. Yeah.
>> Exactly. So [clears throat] those tricky
things, please pay attention and I mean
I can't solve many questions but the few
I can solve. You will see that
you need to be careful and pay
attention. I will tell you few things
that will help you in other question you
try to solve. Definitely.
Please, you have to be careful. Don't
rush. Even when he appears easy, don't rush.
rush. >> Okay.
>> Okay.
>> Thank you. >> Good.
>> Good.
So, it is ant after this first four
years. Now, this corroborated that
luckily so this can confirm your
understanding. The growth rates of the
combined company's free cash flow will
be 5.6 per year. So after this so we
already know that this is actually 4
years actually the planning horizon then
after that everything goes at 5.6%.
So but let's deal with the first four
years that we have
they told us that the combined company's
tax depression is expected to be
equivalent to this. Okay that's fine. So
rout and all the question I've been
trying to answer. I think this will
address it. However, as the company
sales revenue increases over the four
year period the combined company will
require an additional investment for the
first in the first year
and then 64 per $1 increase in sales
revenue. Okay. So we need to get our
tax. We're going to get our depreciation
and all of that. But remember what I
always tell you for cash flow, please
make sure your tax is on profit before
interest and tax, right? Not on profit
before tax alone. But what's our PBIT?
They told us that operation operating
profit margin is at 20%. So we can get
easily 2
times this.
So we have our PBIT
and that is what we're going to pay tax
So we know our tax. Now I want to speak
on this statement on the tax allowable
depreciation being the same as the
current level of operations.
If you look if you look at this
to adjust for your depreciation
what you normally have done is to say
okay add back depreciation
yeah which we don't have the figure of
depreciation of but whatever the
depreciation is if you had it here
because it's going to maintain
investment you add it back here what do
you do when you get to investment
activity you deduct it deduct
So it's not just interesting that they
didn't give us the figure, but rather we
also know that we don't need it because
it's going to be in and out. So even if
you say you want to assume a figure for
your depreciation, you're going to add
it here, then you deduct it again later.
Still doesn't make any impact. So you
still don't earn any mark with that.
But another thing I'm going to mention
to you in this paper, please don't be
locked down that you want to just
calculate a figure, calculate a figure.
If you are running out of time, you can
assume a figure to move on with your
analysis. Even if you don't have any
basis for the calculation, you can say
assume the value of the combined entity
is so so amount and continue with
whatever you can do. You will end mark
on your discussion.
So please manage your time very well and
Right. So we have more cash flow items
Year 1 minus 200.
Year two will be slightly different.
Year two will be equals to 64 as they
told us multiply by the change in
you have that. So remember it's an
outflow so it has to be negative. Please
take note cash inflows by now you should
know cash inflows is positive and cash
outflow is negative.
Once you have your investment remember
financing activity is not relevant here.
So you have a free cash flow item
So for year 1 you have 472 year 234 607.8
607.8
to that. So that's our planning horizon
and we can get the PV
of the planning of phase one planning phase.
Remember in exam you are allowed to use
Excel for your PV. So I'm going to do
this work is equals to this place.
So we need to calculate our work.
And to calculate work, we need to
calculate cost of cost of debts, cost of
equity of the combined company. Then we
can get our work.
What we know for sure is that um for
this combined entity they said the
current annual growth rate okay or sorry
borrowing rate. So this RF
But we don't know the equity better of
the combined entities. There are two
phases of growth of cash flow. There is
um this one is the initial phase and
after this one we have the perpetrator
side and I'm going to come to that. But
before we can do any of that we need to
know our cost of capital which in this
question for the combined entity they
did not give us the 10% that I used
earlier was for for sure which we cannot
use it. So we need to calculate the
whack for the combined entity which
means after acquisition what will be the
cost of debt and what will be the cost
of equity that's what I want to work on now.
now.
Yeah and from what we have in the
question the cost of debt looks pretty
straightforward but the cost of equity
is not the same. So I can see that they
actually told us that
everything happening is after the
acquisition and they told us that the
interest on borrowing will be 5.3%. So
we know that 5.3% is the cost of debt
but we don't know what's going to be for
cost of equity. To get the cost of
equity we use capital asset pricing
model looking at information that they
have given us here. We have everything
except from beta. This is risk-f free
rate. Remember
if we use capital asset pricing model it
means that we need risk free rate plus
beta into bracket RM minus RF.
RM minus RF is your market risk premium.
So 7%. So beta is what we don't we don't
have equity beta to be precise. So we
need to calculate equity beta for the
Now please pay very solid attention here.
here.
If you remember your Miglania Miller
formula for asset beta, it said asset
beta is equals to V / V + V D into
bracket 1 minus T
all of that multiply by V beta. It's the
same formula we use whether we are
calculating asset beta or equip beta.
You just need to rearrange right but
this time around is equator we want to
calculate because
Yeah
3070 which is uh 30 debt 70 equity.
But the beta asset that we're going to
be using has to be for the combined
entity. We don't know it. We only know
the asset beta for chik paye and asset
beta for for sure for sure has 0.95 and
chip pay has8
equator of each of them is not useful to
us because they are different companies isolated we cannot merge it like that
isolated we cannot merge it like that because they have different capital
because they have different capital structure we need to focus on the
structure we need to focus on the business risk side of beta and that is 8
business risk side of beta and that is 8 and 0.95
and 0.95 and they've told us clearly
and they've told us clearly that for the combined entity the asset
that for the combined entity the asset beta has to be weighted using the value
beta has to be weighted using the value of equity.
of equity. So which means the combined bit asset
So which means the combined bit asset beta
we have chip pay and we have for sure the asset beta is for chicken pay is8
market value of equity of Chip is equals to they gave us in the
of Chip is equals to they gave us in the question I think earlier as 12600 here.
question I think earlier as 12600 here. Yeah, you can see it. So 12600
Yeah, you can see it. So 12600 and for this guy we calculated it
and for this guy we calculated it earlier on as 95.
earlier on as 95. So if I add that together cuz I need to
So if I add that together cuz I need to get the proportion you know. So
get the proportion you know. So proportion
is equals to that divide by the total. So 93%.
So now I know the percentages then I can wait to get the total
wait to get the total combined asset beta. So which means this
combined asset beta. So which means this will be 93% of his asset beta and this
will be 93% of his asset beta and this one will be 7% of the asset beta. Then
one will be 7% of the asset beta. Then the total asset beta is for the combined
the total asset beta is for the combined entity which is equals to this plus
entity which is equals to this plus this.
this. So we know our combined asset beta to be
So we know our combined asset beta to be 819.
819. So we know that for sure. But what we
So we know that for sure. But what we need is the equity beta which we need to
need is the equity beta which we need to put in here. So if you rearrange this
put in here. So if you rearrange this formula,
formula, yeah, top of my head I try this. So B
yeah, top of my head I try this. So B will be equals to
yeah the same formula I just rearranged it. Then I can now apply the formula
it. Then I can now apply the formula now. So my B is equals to the combined
now. So my B is equals to the combined asset beta of this multiply by V. My V
asset beta of this multiply by V. My V is the volume of equity which is 70
is the volume of equity which is 70 plus
plus V D is 30 multiply by 1 minus T.
V D is 30 multiply by 1 minus T. The auditor told us tax is 20% for both
The auditor told us tax is 20% for both companies.
companies. Then uh I need to close this bracket
all of that divided by
Then easy to get our cost of equity because cost of equity is simply equals
because cost of equity is simply equals to RF which is 2%. They already told us
to RF which is 2%. They already told us right here
right here the risk-free rate is at 2%.
the risk-free rate is at 2%. Yes, they gave us here.
Yes, they gave us here. So plus beta
So plus beta which is this [clears throat]
which is this [clears throat] multiply by risk premium they give us
multiply by risk premium they give us that to be 7%.
So I'm going to put our cost of equity here.
here. Then we need to get our proportion for
Then we need to get our proportion for each of the capital before we get the
each of the capital before we get the work. So what's the value we are talking
work. So what's the value we are talking about here? The value for KD is uh 30. K
about here? The value for KD is uh 30. K is 70 because that is they gave us that
is 70 because that is they gave us that 3070.
3070. So which means WA
So which means WA can now be equals to
can now be equals to this
this multiply by this.
multiply by this. Let me make this.3 just to make it
Let me make this.3 just to make it faster.
faster. Yeah. and this 7 70%.
So whack is actually coming to 8.33%. So
So once we know WA
once we know WA everything is easy. So instead of
everything is easy. So instead of putting XX here now I'm going to look
putting XX here now I'm going to look it. I'll link it to my wax straight away
it. I'll link it to my wax straight away and so I can have the planning fees
and so I can have the planning fees present value.
present value. I hope that part is clear. I'm still
I hope that part is clear. I'm still breathing the value of the company.
breathing the value of the company. Remember this is not the old value. This
Remember this is not the old value. This is just the earning phase.
is just the earning phase. All of this that we have done is for to
All of this that we have done is for to just be able to get the work of the
just be able to get the work of the company which is what we will use as
company which is what we will use as cost of capital to discount.
cost of capital to discount. So now we know the present value of the
So now we know the present value of the cash flows that we know but there's a
cash flows that we know but there's a cash flow that we don't know which is
cash flow that we don't know which is the cash flow after year four from year
the cash flow after year four from year five to eternity. But one thing we know
five to eternity. But one thing we know is that this cash flow will grow at
is that this cash flow will grow at 607.8. 8.
607.8. 8. We know that's what's going to happen.
We know that's what's going to happen. It will grow at 607. Sorry, this 607.8
It will grow at 607. Sorry, this 607.8 will grow at
will grow at 5.3%.
5.3%. Or what rate did they give us? They give
Or what rate did they give us? They give us a rate. Yes, 5.6% rather.
us a rate. Yes, 5.6% rather. So if your cash flow will grow at 5.6%
So if your cash flow will grow at 5.6% till eternity perpetual,
till eternity perpetual, what will be the value as at the end of
what will be the value as at the end of year four? Remember [snorts]
year four? Remember [snorts] the cash flow you are talking about is a
the cash flow you are talking about is a cash flow that will happen from year
cash flow that will happen from year five and every cash flow is assumed to
five and every cash flow is assumed to take place at the end of the year. So
take place at the end of the year. So which means that cash flow will start
which means that cash flow will start from the end of year five. So when you
from the end of year five. So when you start to discount from end of the year
start to discount from end of the year five to future up to the beginning of
five to future up to the beginning of year five that is end of year four. So
year five that is end of year four. So what you are saying is that whatever PV
what you are saying is that whatever PV you get is at this point. So when you
you get is at this point. So when you get that EV then you still need to PV it
get that EV then you still need to PV it again to bring it to year zero where
again to bring it to year zero where everybody is because this is just
everybody is because this is just partial discounting.
partial discounting. So but the first thing you need to do is
So but the first thing you need to do is to get the PV at this point. And how do
to get the PV at this point. And how do you do that?
So I'll >> formula
>> formula >> what which of the formula are we going
>> what which of the formula are we going to use?
to use? >> The PV uh future value 1 + uh R and then
>> The PV uh future value 1 + uh R and then number of years. Yes, we're going to use
number of years. Yes, we're going to use this same formula again
this same formula again because it's a growth to perpetuity.
because it's a growth to perpetuity. If it was not growing, what what do you
If it was not growing, what what do you think we would have done? Anybody? If
think we would have done? Anybody? If there was no growth if if they had told
there was no growth if if they had told you that
you that this cash flow of 607.8 will remain the
this cash flow of 607.8 will remain the same from year five till eternity. What
same from year five till eternity. What how what difference would that make in
how what difference would that make in terms of initial PV for that phase two?
terms of initial PV for that phase two? I think we would first use the annuity
I think we would first use the annuity factor.
>> Not exactly. >> And then factor factor
>> And then factor factor >> of capital.
>> of capital. >> Exactly. Remember annoying factor will
>> Exactly. Remember annoying factor will only work if you have a definitive
only work if you have a definitive constant cash.
constant cash. >> Yeah. So if it's a constant cash for
>> Yeah. So if it's a constant cash for some years then factor will work because
some years then factor will work because you have a definitive years 3 years 4
you have a definitive years 3 years 4 years 10 years or whatever. But if it's
years 10 years or whatever. But if it's a growth till eternity is or sorry if
a growth till eternity is or sorry if it's a constant cash flow till eternity
it's a constant cash flow till eternity then it's just the cash flow divided by
then it's just the cash flow divided by the cost of capital right but this one
the cost of capital right but this one is now a growth to eternity then your
is now a growth to eternity then your dividend model will have to come into
dividend model will have to come into play nice
play nice if you use that then you have easy thing
if you use that then you have easy thing to deal with so you have this multiply
to deal with so you have this multiply by the growth rate is given 1.56
by the growth rate is given 1.56 5.6 6. So that's 1 + 5.6%.
Divided by cost of capital. Our cost of capital is work minus growth rates. We
capital is work minus growth rates. We know is 5.6%.
And we can get our initial present value. So this present value you
present value. So this present value you have here is the present value at this
have here is the present value at this point at the end of year four. So which
point at the end of year four. So which means you cannot stop there. You need to
means you cannot stop there. You need to bring it to year zero and that is the
bring it to year zero and that is the final PV. And in that case you have a
final PV. And in that case you have a single cash flow at the end of year
single cash flow at the end of year four. You want to bring it to year 0.
four. You want to bring it to year 0. All you need to do is to just use your
All you need to do is to just use your PV table and get your discount factor
PV table and get your discount factor and multiply it at 4 years then maybe
and multiply it at 4 years then maybe 8.3%. But rather because you are working
8.3%. But rather because you are working on Excel, you can just do the
on Excel, you can just do the calculations straight away and because
calculations straight away and because you might be wondering how do I check
you might be wondering how do I check 8.3 on the table. You can use 8%. But
8.3 on the table. You can use 8%. But rather I prefer you to just work it out.
rather I prefer you to just work it out. Better you just work it out. So present
Better you just work it out. So present value is this multiply by 1 +
value is this multiply by 1 + r which is your discounting factor
r which is your discounting factor then raised to power -4
then raised to power -4 and that will give you
and that will give you your your final PV.
your your final PV. Okay. So this is the final PV for the
Okay. So this is the final PV for the phase two. So which means the total if I
phase two. So which means the total if I bring this down so that it doesn't
Let me put this one here. Yeah. So the total [clears throat] value now
total FM value is now equals to the planning phase value plus the second
planning phase value plus the second phase value and that gives you that
phase value and that gives you that total.
total. But remember what the question want us
But remember what the question want us to calculate is the equity value not the
to calculate is the equity value not the total firm value. So can you tell me
total firm value. So can you tell me what the equity value will be every
what the equity value will be every anyone?
>> I think it will be 70% of that figure. >> Thank you very much. Because
>> Thank you very much. Because it's 3070
it's 3070 that's the capital structure they told
that's the capital structure they told us that will remain
us that will remain 30 ratio 70. So 70% of that figure is
30 ratio 70. So 70% of that figure is actually the equity value of a combined
actually the equity value of a combined entity which is actually what
entity which is actually what the B is asking us to calculate.
Once we've done that, we've dealt with question B.
But the third one still wants us to go further. And the third one says that we
further. And the third one says that we should evaluate whether the acquisition
should evaluate whether the acquisition of for sure would be beneficial
of for sure would be beneficial to Chikipe shareholders and also discuss
to Chikipe shareholders and also discuss the limitations of the method. Yeah,
the limitations of the method. Yeah, we'll talk about the limitations but
we'll talk about the limitations but first of all
first of all we need to decide does this make sense
we need to decide does this make sense for
for the question is how do we know whether
the question is how do we know whether it makes sense? Like I always say, it
it makes sense? Like I always say, it will only make sense if there's a value
will only make sense if there's a value in it. But you don't just say if there's
in it. But you don't just say if there's a value in it. You need to be able to
a value in it. You need to be able to quantify how much is this value we are
quantify how much is this value we are talking about. Yeah, we are saying that
talking about. Yeah, we are saying that after acquisition the equity value is
after acquisition the equity value is this. But before acquisition, what is
this. But before acquisition, what is the value of the companies separately?
the value of the companies separately? Yeah.
Yeah. Before acquisition
for sure right
we got for sure to be this so which means before acquisition via Add them
means before acquisition via Add them together both of them
together both of them they are giving us this figure 13585
would this make sense for anybody to do if the after value is
for anybody to do if the after value is 13212?
13212? Does this make sense?
Does this make sense? >> No,
>> No, >> it does not make sense.
>> it does not make sense. >> In the absence of real options, it
>> In the absence of real options, it doesn't make sense.
doesn't make sense. >> Exactly.
>> Exactly. >> I have um
>> I have um >> I have a question to that.
>> I have a question to that. >> Yes.
>> Yes. >> Yes. when we answer that question do we
>> Yes. when we answer that question do we say no categorically because I have a
say no categorically because I have a feeling like okay financially doesn't
feeling like okay financially doesn't make sense what about other synergies do
make sense what about other synergies do we need to consider those
we need to consider those >> yeah so
>> yeah so if you look at this question evaluate
if you look at this question evaluate whether the acquisition of them is
whether the acquisition of them is beneficial so first of all you start
beneficial so first of all you start with empirical data
with empirical data that's first of all one thing I need to
that's first of all one thing I need to understand is a question like this can
understand is a question like this can give you any type of answer and you will
give you any type of answer and you will still be correct depends on how you've
still be correct depends on how you've approached it. And let me give you a
approached it. And let me give you a typical example.
typical example. Assuming that someone has calculated WA
Assuming that someone has calculated WA to be 8.33,
to be 8.33, okay, and has decided to say I'm going
okay, and has decided to say I'm going to use my present value table, which
to use my present value table, which means I'll just use 8% instead of 8.33.
means I'll just use 8% instead of 8.33. What it means is that this PV that use
What it means is that this PV that use 8.33% that person would have used 8%.
8.33% that person would have used 8%. Watch me. I'm going to revert back for
Watch me. I'm going to revert back for this. For this as well, this person
this. For this as well, this person would have used 8% here.
this as well used 8%.
used 8%. You'll see something.
What did you see to equity value just by using 8% instead of 8.33?
using 8% instead of 8.33? Do you see how much this equity value
Do you see how much this equity value has gone up?
Can you see that? It will be a different decision.
decision. [laughter]
Can you see that? >> Yes sir.
>> Yes sir. >> That is why it is important for you to
>> That is why it is important for you to understand what you are doing because
understand what you are doing because there is no one way to your answer
there is no one way to your answer especially in a strategic paper. You
especially in a strategic paper. You just need to stay on your logic and go
just need to stay on your logic and go on with whatever you are doing. Just
on with whatever you are doing. Just using 8% instead of 8.33 will make
using 8% instead of 8.33 will make acquisition make sense. Whereas if you
acquisition make sense. Whereas if you stick to your absolute data,
stick to your absolute data, I go back to absolute data.
I go back to absolute data. Yes, you will see that it does not make
Yes, you will see that it does not make sense
sense and you have to actually conclude based
and you have to actually conclude based on your data. So the first thing you say
on your data. So the first thing you say is based on a calculation the total
is based on a calculation the total value after syn after acquisition. So
value after syn after acquisition. So total
total value of combined entity
is equals to this. This is what we have 13214.
13214. So value from acquisition
So value from acquisition value from acquisition has to be the
value from acquisition has to be the value after combination minus the value
value after combination minus the value before. And here it gives negative.
before. And here it gives negative. So we can't it's not good and that is
So we can't it's not good and that is what you have to say. So on this
what you have to say. So on this analysis based on this analysis it is
analysis based on this analysis it is not
not advisable for uh chik to acquire for
advisable for uh chik to acquire for sure. Now what you can now say is
sure. Now what you can now say is however beyond this data looking at the
however beyond this data looking at the fact that the synergy loss is narrowly
fact that the synergy loss is narrowly negative because it's quite small. Yeah.
negative because it's quite small. Yeah. or even if it is even large negative,
or even if it is even large negative, you can still say chip pay might have
you can still say chip pay might have other strategic reason why they want to
other strategic reason why they want to go ahead. However,
go ahead. However, based on the analysis and the negative
based on the analysis and the negative amount of synergy calculated,
amount of synergy calculated, GKP should not go ahead with the
GKP should not go ahead with the acquisition.
acquisition. That is how you will say it. Right? But
That is how you will say it. Right? But like I said, it is very important for
like I said, it is very important for you to know that one decision is not
you to know that one decision is not always the final answer. Most important
always the final answer. Most important is that your logic must reflect your
is that your logic must reflect your answer and your explanation.
answer and your explanation. So let's talk about limitations. What
So let's talk about limitations. What are the limitations?
are the limitations? Because this is where you have to
Because this is where you have to actually also pay attention to
actually also pay attention to the scenario. Yeah. So now assessment of
the scenario. Yeah. So now assessment of acquisition you have to discuss it based
acquisition you have to discuss it based on your output is negative
on your output is negative synergy. So you advise that they
synergy. So you advise that they shouldn't do it. But if yours gives
shouldn't do it. But if yours gives positive definitely you advise that they
positive definitely you advise that they should do it. But like I said if someone
should do it. But like I said if someone has used present value factor at 8%.
has used present value factor at 8%. Yeah you'll be positive. But if you work
Yeah you'll be positive. But if you work strictly on Excel everything it will be
strictly on Excel everything it will be negative. All both of you will get your
negative. All both of you will get your answer and your marks 100%.
answer and your marks 100%. What are the limitations of the method?
What are the limitations of the method? We've used method for discounting factor
We've used method for discounting factor which should be good but however it has
which should be good but however it has its own issues based on the way we've
its own issues based on the way we've approached it and this where you get
approached it and this where you get some marks on professional skepticism
some marks on professional skepticism when you start challenging some of the
when you start challenging some of the assumptions that have been made and all
assumptions that have been made and all of that. Yeah. So and those are your
of that. Yeah. So and those are your limitations that you'll be talking
limitations that you'll be talking about. You remember that it gave us some
about. You remember that it gave us some information to use.
information to use. Yeah. Which um we struggled with some of
Yeah. Which um we struggled with some of them is beta.
them is beta. Beta
Beta it gave us beta for each company and we
it gave us beta for each company and we had to wait it to get the combined beta.
had to wait it to get the combined beta. So normally when you have to calculate
So normally when you have to calculate cost of equity using beta, one thing you
cost of equity using beta, one thing you know for sure is that beta is not always
know for sure is that beta is not always an easy data to get. So that's a that's
an easy data to get. So that's a that's one limitation you need to not yeah
one limitation you need to not yeah difficulty getting beta
difficulty getting beta if you know how beta is gotten then you
if you know how beta is gotten then you realize that it's actually a long
realize that it's actually a long process you have to get a long
process you have to get a long historical data you plot a graph then
historical data you plot a graph then you do regression analysis to actually
you do regression analysis to actually get beta of company so naturally
get beta of company so naturally anywhere you have to use beta the
anywhere you have to use beta the disadvantage of that method is always
disadvantage of that method is always difficulty in getting beta is always
difficulty in getting beta is always going to be valid
going to be valid that's something to note
that's something to note and likewise they told us that um the
and likewise they told us that um the growth to perpetuity
growth to perpetuity yeah growth to perpetuity I'm sure you
yeah growth to perpetuity I'm sure you know that that is not given it's a wish
know that that is not given it's a wish um yeah even if you plan to go to
um yeah even if you plan to go to perpetrity it's not always the reality
perpetrity it's not always the reality yeah it's not guaranteed
always know that but we have done our valuation based on that Yeah.
valuation based on that Yeah. Yeah. I said it's difficult in getting
Yeah. I said it's difficult in getting beta especially the fact that this guy
beta especially the fact that this guy is unlisted that come to mind now for
is unlisted that come to mind now for sure is even unlisted. So even makes it
sure is even unlisted. So even makes it more more difficult if for sure is
more more difficult if for sure is unlisted is even worse. So take note of
unlisted is even worse. So take note of that.
Likewise even the growth assumption of 5.6 Six also we don't know the basis 5.6
5.6 Six also we don't know the basis 5.6 revenue growth
revenue growth and cash flow revenue and cash flow it
and cash flow revenue and cash flow it say it will grow by 5.6 to eternity that
say it will grow by 5.6 to eternity that rates
rates yeah is without assumption.
Yeah, not given and um you don't know how realistic.
So you can see here you are challenging those assumptions and that's where you
those assumptions and that's where you earn even more marks on professional
earn even more marks on professional skepticism to say you are skeptical
skepticism to say you are skeptical about those data. You have asked me to
about those data. You have asked me to grow revenue by 5.6%. On what
grow revenue by 5.6%. On what assumptions? You don't know you don't
assumptions? You don't know you don't have it. So this 5.6 six is only as
have it. So this 5.6 six is only as accurate as much as the assumptions are
accurate as much as the assumptions are good which you don't even have access to
good which you don't even have access to those assumptions. Right?
those assumptions. Right? There's something as well that you
There's something as well that you notice
the initial there was one growth trade that we did here 83 and 98
that we did here 83 and 98 that is an historical rate that we have
that is an historical rate that we have used to project the future of valuation
used to project the future of valuation of for sure that is also a problem
of for sure that is also a problem because you can it's not that you can't
because you can it's not that you can't use it but you should know that it's not
use it but you should know that it's not the best way using historical rates
to project into future.
into future. That's also a problem. It's not
That's also a problem. It's not advisable. So those are all your
advisable. So those are all your limitations. You can list them and but
limitations. You can list them and but please make sure you link them. You can
please make sure you link them. You can see we're picking them from the case. So
see we're picking them from the case. So actually they are things that are
actually they are things that are relevant to the question. So once you
relevant to the question. So once you finish you need to conclude and your
finish you need to conclude and your conclusion will definitely come from
conclusion will definitely come from your results and your assessment which
your results and your assessment which is the fact that yeah it looks that
is the fact that yeah it looks that there a lot of synergy opportunities but
there a lot of synergy opportunities but in terms of data and the analysis that
in terms of data and the analysis that have been done it doesn't look like this
have been done it doesn't look like this will add value to the shareholders
will add value to the shareholders because the synergy value is negative.
because the synergy value is negative. However, if it was positive, it would
However, if it was positive, it would have been a uh viable opportunity. But
have been a uh viable opportunity. But with the way it is, you cannot advise
with the way it is, you cannot advise them to go forward with it. And that's
them to go forward with it. And that's it for that report.
it for that report. Then you can go to D
Then you can go to D and deal with D
and deal with D as discover the mandatory bid rule and
as discover the mandatory bid rule and principle of equal treatment protect
principle of equal treatment protect shareholders in the event of their
shareholders in the event of their company facing a takeover bid. This one
company facing a takeover bid. This one I touched on it uh briefly when I was
I touched on it uh briefly when I was speaking. This is just talking about
speaking. This is just talking about regulations trying to protect
regulations trying to protect shareholders and the larger stakeholders
shareholders and the larger stakeholders actually when you are dealing with uh
actually when you are dealing with uh acquisition and what they are trying to
acquisition and what they are trying to just do is to make sure that everybody
just do is to make sure that everybody is taken care of not just the majority
is taken care of not just the majority shareholders. So when you talk about the
shareholders. So when you talk about the the mandatory bid rule
the mandatory bid rule mandatory
Yeah, mandatory bid. The focus of that is just to ensure that that the minimum
is just to ensure that that the minimum selling price that you pay minority
selling price that you pay minority shareholders
shareholders is
is the
the recent price of share transaction. So
recent price of share transaction. So take for instance if that share has been
take for instance if that share has been traded recently in the market at a
traded recently in the market at a particular price you cannot buy the
particular price you cannot buy the shares of the minority shareholders at
shares of the minority shareholders at any value less than that because like I
any value less than that because like I said
said the buyers are always
the buyers are always pushed to focus on the majority
pushed to focus on the majority shareholders because they just feel like
shareholders because they just feel like those are the guys that matter
those are the guys that matter whereas the minority shareholders they
whereas the minority shareholders they don't have option once the shareholders
don't have option once the shareholders that matters have agreed to sell. They
that matters have agreed to sell. They rather stick to it or they sell at any
rather stick to it or they sell at any price they want to sell.
price they want to sell. And these are the reasons why the rules
And these are the reasons why the rules are coming in. So this is a rude saying
are coming in. So this is a rude saying that okay if this price of share was $10
that okay if this price of share was $10 yesterday and you are buying today, you
yesterday and you are buying today, you can't buy less than $10 from the
can't buy less than $10 from the minority shareholders. Don't treat them
minority shareholders. Don't treat them like see if they don't have option.
like see if they don't have option. Yeah. So in summary, what I'm saying is
Yeah. So in summary, what I'm saying is that the minimum selling price
The minimum selling price should be the
should be the maximum
of of the shares trade.
Yeah. So whatever has been traded recently the price that have been used
recently the price that have been used will be the minimum selling price. So
will be the minimum selling price. So this minimum selling price
this minimum selling price for minority
for minority shareholders. Remember these laws, these
shareholders. Remember these laws, these two laws are actually protecting the
two laws are actually protecting the minority shareholders.
minority shareholders. And if you look at the other one which
And if you look at the other one which is the principle of equal treatment.
The name already say it all. It's just saying that the way you treat the
saying that the way you treat the majority shareholders the same way you
majority shareholders the same way you should treat the minority shareholders.
should treat the minority shareholders. So whatever you pay to the majority
So whatever you pay to the majority shareholders, whatever benefit you give
shareholders, whatever benefit you give to majority shers, give it to minority
to majority shers, give it to minority shers, that's what this one is talking
shers, that's what this one is talking about. So whatever
about. So whatever [snorts]
[snorts] price or value
price or value or benefit
you pay to majority shareholders,
shareholders, same must be paid to minority
same must be paid to minority shareholders. So sometimes you pay to
shareholders. So sometimes you pay to majority shareholders and you even
majority shareholders and you even promise them some contingent benefit.
promise them some contingent benefit. The same thing you must do the minority
The same thing you must do the minority shareholders.
shareholders. The same way you treated them, [snorts]
The same way you treated them, [snorts] you must treat all of them. Not
you must treat all of them. Not segregation. There's no no separation of
segregation. There's no no separation of treatment.
treatment. Yeah. Even though shareholders are the
Yeah. Even though shareholders are the ones that take the decisions, they are
ones that take the decisions, they are not any different from minority
not any different from minority shareholders. That is what that
shareholders. That is what that particular role is talking about. So
particular role is talking about. So that is it for this
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