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Doubts in merger & acquisition - sfm

surabhi (Student) (33 Points)

26 August 2015

There is a question in PM of Nov 15 I.E. Q 37 which states that capital expenditure net of depreciation will grow at 15% p.a. .the base year has 750 Cr as capital expenditure and 600 Cr as depreciation. Now for calculation of Cashflow they calculated EAT by adding back depreciation and then they deducted 172.5 as cap exp net of depreciation. But I think it's just the amt increased which they have deducted why not the total cap exp which in my view should be 750+172.5..

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CA. Sandeep Kumawat (CA) (341 Points)
Replied 27 August 2015

Can you post complete question?

I did not find this question in PM available on BoS website.

I think in question EBIT is given and it will grow at prescribed rate, hence there is no logic of adding back depreciation, because EBIT is post dep and we don't know rate of depreciation.

and if you look from cash flow prospective you have to add back depreciation in EAT, instead you can reduce Capex by dep, it will have same effect.

2. Capex will grow @ 15%, here we are looking for increamental cash inflow and outflow and not for gross investment.

surabhi (Student) (33 Points)
Replied 27 August 2015

Actually here we are not looking for incremental cash flows coz we have to find the value of business so we take gross cash flows. Thanks a lot. And I checked it its on page 13.57 Q37 ..Please have a look.

surabhi (Student) (33 Points)
Replied 27 August 2015

Its chapter 13 Mergers and Acquisitions

CA. Sandeep Kumawat (CA) (341 Points)
Replied 27 August 2015

If you read EBIT will grow at 20%, this EBIT has impact of all changes in revenue, COGS, Opex and dep. gross dep for the year is reduced to arrive at EBIT for the period.

you can add back depreciation if you are working with operating cashflow, here we are looking and net cashflow over the growth period after that growth is stable.

objective in this question is to caclulate PV of all future cashflow, and net cashflow for the period will be pulled back to T=0 and terminal cash flow will also be pulled, when you are pulling terminal cashflow it include all investments, if we apply you logic of 750+172 it will create duplicity and initial 750 and all investments will be realised as terminal cashflow.

hope this help

surabhi (Student) (33 Points)
Replied 27 August 2015

I am still not clear with the capital expenditure. It's growth is 15% which is after netting off..but gross amount That is my cash outfow should be the whole amount including the growth. Y just increase we are taking...