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Fear factor 1. a $50 in global steel price will result in $414 m loss from
Corus acquisition
Fear factor 2. a $75 fall would lead the new firm to a loss of $846 m.
E D
WACC = K e * + Kd * (1 − t ) * .
D+E D+E
∞
FCF1 FCF2 FCFt
Value = + + ... = ∑
(1 + wacc) (1 + wacc) 2
t =1 (1 + wacc ) t
Operating invested capital consists of all the operating assets, which the firm uses
to generate NOPAT. It includes the fixed assets, the working capital, and other
operating assets. If for example, we classify investments as an operating activity,
then investments will also be included as part of operating invested capital.
Similarly, capital work in progress is not used to generate the NOPAT and hence
must not be included in the operating invested capital.
NOPATt
ROIC =
Operating Invested Capitalt −1
Financial Synergy
• Risk of cash flows may decrease, particularly when cash flow
streams of are not perfectly correlated.
• Higgins and Schall: Debt coinsurance effect. If the income
streams of both the firms are perfectly positively correlated, one of
them could face the conditions of bankruptcy.
• But which one, that may not be so easy to predict. Debt holders
gain at the cost of equity holders.
• Bankruptcy cost may be lowered.