Prof. Ian Giddy, New York University
Based in Iceland, Actavis is one of the world's faster growing generic pharmaceutical companies. In mid 2006, the company made a bid for Croatia's leading generics company. The offer was half in cash, and half in shares. Management of the target company advised shareholders not to accept Actavis' bid, which was made in shares. Actavis, they argued, was overvalued and overleveraged, like the Icelandic market as a whole. They pointed to the fact that while the bidder's share price had risen 35% during the past year, earnings were flat.
Free Cash Flows
1. Is she right? Using the data given above, please calculate Actavis' free cash flows to the firm (FCFF).
2. In the case of Actavis, what are the reasons free cash flows differ from earnings?