Comment, question or quotation of the day

02-11-2021 : Answer to the weekend teaser



Let’s first remind the issue

A young M&A analyst values an unleveraged company at 1,000 using a DCF. Its share capital is composed of 40 common shares and 60 non-voting preferred shares. The value of the share is therefore 1000/(60+40) = 10 

After analysis, she considers that the absence of voting rights requires a discount of 20%. She therefore has 40 ordinary shares valued at 10 euros and 60 preference shares at 8 euros. She notices that the equity value is equal to 10 * 40 + 8 * 60 = 880 and not 1000. She wonders if this is not a nonsense since the cash flows have not moved.

Can you help her?

 



And here is our suggestion. Her error in reasoning is to consider that the discount is a complete loss of value, like evaporation. In fact, it benefits the voting shares and their holders. She should thus reason :

40 x P + 60 x P x (1 - 20%) = 1000, where P = 11.36 and the value of the preferred shares at 9.09. 


 

Have a nice day.

29-10-2021 : Teaser for the weekend


A young M&A analyst values an unleveraged company at 1,000 using a DCF. Its share capital is composed of 40 common shares and 60 non-voting preferred shares. The value of the share is therefore 1000/(60+40) = 10 

After analysis, she considers that the absence of voting rights requires a discount of 20%. She therefore has 40 ordinary shares valued at 10 euros and 60 preference shares at 8 euros. She notices that the equity value is equal to 10 * 40 + 8 * 60 = 880 and not 1000. She wonders if this is not a nonsense since the cash flows have not moved.

Can you help her?

Good thinking and good weekend. 



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The Vernimmen.com Letter

Number 139 of October 2021

News : Calculation tips when determining the cost of capital

Statistics : Forward P/E ratios and subsequent 10-year returns

Research : The impact of activist funds on acquisition and disposal policies

Q&A : Can we say that the equity of a company is a "debt" of the company to its shareholders?

COMMENTS : Comments posted on Facebook