Methods of determining the value of a target in a merger or acquisition include:
ID: 2653832 • Letter: M
Question
Methods of determining the value of a target in a merger or acquisition include:
the discounted cash flow method and the price-earnings method.
the weighted average cost of capital method and the discounted cash flow method.
the present value method and the price-earnings method.
the discounted cash flow method and the earnings-per-share method.
the discounted cash flow method and the price-earnings method.
the weighted average cost of capital method and the discounted cash flow method.
the present value method and the price-earnings method.
the discounted cash flow method and the earnings-per-share method.
Explanation / Answer
Merger is a process of acquiring one firm by another. At the time deciding on acquisition, the acuquiring firm will calculate present value of future cash flows from the acquired firm. If it found that present value of cash flow after acquisition is more than preacquisition present value of cash flow, then deal of acquisition becomes valuable. In this present value calculation you have to use weighted average cost of capital (WACC) for discounting purpose. It is the minimum required rates of return that firm has to earn for satisfying investors.
Answer: weighted average cost of capital and discounted cash flow method are used in determining value of a target in merger.