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Title: Mergers & Aquisitions
Description: Methods that are used for valuating a target company by an acquirer. These are the most important methods to know and are listed with advantages and disadvantages of using them, and which one to use when.
Description: Methods that are used for valuating a target company by an acquirer. These are the most important methods to know and are listed with advantages and disadvantages of using them, and which one to use when.
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Cash flow that is the most appropriate to use is the FCF (free cash flow), which is the cash flow
after capital expenditures
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The cash flows and estimated value are based on forecasted fundamentals
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Disadvantages for using this method are:
If a company is growing rapidly, the FCF and Net Income may be misaligned
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Estimating discount rates is difficult, and these rates may change over time
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Comparable Company Analysis Method
The analysis is based on selecting comparable companies, calculating relative measures,
applying the metrics to the target and estimating the takeover price
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Readily available inputs
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Disadvantages for using this method are:
Sensitive to market mispricing
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Historical premiums may not be accurate
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Comparable Transaction Analysis Method
The method lies into the idea: collect information on takeover transactions of the companies,
calculate multiples and estimate take over value based on these multiples
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It is based on recent market transactions, so information is current and observed
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Disadvantages to using this method are:
Depends on the correctness of takeover transactions valuations
There may not be sufficient to observe the valuations
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Equity Approach Method (FTE) Flow To Equity:
Discount the cash flows available to the holders of equity capital, after allowing for cost of
servicing debt capital
Advantages: Makes explicit allowance for the cost of debt capital
Disadvantages: Requires judgment on choice of discount rate
Entity Approach Method (APV) Adjusted Present Value Approach:
Discount the cash flows before allowing for the debt capital (but allowing for the tax relief
obtained on the debt capital)
Advantages: Simpler to apply if a specific project is being valued which does not have
earmarked debt capital finance
Disadvantages: Requires judgment on choice of discount rate; no explicit allowance for cost of
debt capital, which may be much higher than a "risk-free" rate
Weighted average cost of capital approach (WACC)
Derive a weighted cost of the capital obtained from the various sources and use that discount
rate to discount the cash flows from the project
Advantages: Overcomes the requirement for debt capital finance to be earmarked to particular
projects
Disadvantages: Care must be exercised in the selection of the appropriate income stream
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Basic Financial Statement Ratio Analysis
Advantages: Simplifies financial statements, helps in comparing different sized companies with
each other, helps trend analysis (comparing a single company over a period), forecasting and
planning, budgeting, measuring operating efficiency, indication of overall profitability, aid to
decision making
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Title: Mergers & Aquisitions
Description: Methods that are used for valuating a target company by an acquirer. These are the most important methods to know and are listed with advantages and disadvantages of using them, and which one to use when.
Description: Methods that are used for valuating a target company by an acquirer. These are the most important methods to know and are listed with advantages and disadvantages of using them, and which one to use when.