In question no. 24 25 & 28 how to solve them and logic behind it can anyone please help.
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I think the answer provided in Q24 is very lucid to grab. DDM aapne kab use karte hay? When the dividends are predictable. To jab controlling shareholder present in Company A, he has the power to change the stream of dividend payments. So, that becomes a risk. You may see the other two reasons as well provided in the answer, but this very line hits the spot that DDM shouldn’t be used here. Rather, the FCF approach would be a better measure. Amongst FCF approaches, due to the presence of a stable capital structure, valuing the equity using the FCFE approach would be preferable, because, it simpler to use. Otherwise, you’d have to go through the complexities of estimating the debt of the firm, which in turn is tedious and complex. A more parsimonious FCFE approach is preferred in case of a stable capital structure. Hence, B.
Q25 is Level 1 stuff. To get to FCF from NI, we got to get to CFO first, meaning, reversing all non cash charges ( substracting all non cash incomes and adding back all non cash expenses). Transaction 1 & 2 are non cash losses, to be added back to NI and Transaction 3 alone is a non cash gain ( since a reversal of restructuring charge would mean that we are adding back restructuring charge which we deducted earlier), to be substrated from NI to get the CFO. Hence, C.
Q28 speaks of Company A only. Because, if company A is valued using the formula mentioned, then to hum log ye assume karr rahe hay ki depreciation is the only non-cash charge for Company A, jo ki pura galat hay. Q25 me hi aapne 3 aur non-cash transactions dekhe jo company A ka hua hay other than depreciation and further non cash charges hone waala hay future me related to restructuring. So, sirf depreciation lenge as a non cash charge, to don’t you think the valuation would be extremely inaccurate?
Thank you so much sir best answer