Valuing a Business Acquisition Opportunity Case Solution

 What are the benefits?

The benefits of calculating the terminal value are for the target company as they receive the consideration not only for the next 5 to 10 years but also for the time that the company will stay in business which is usually till perpetuity. The role of the terminal value in discounted cash flows valuations has often been the source of much criticism of the discounted cash flow approach as the critics argue that too great a proportion of the discounted cash flow value comes from the terminal value and that it is very easy to manipulate the terminal value to yield nay number that the company wants to which is wrong.
The terminal value of the company is designed to capture the growth potential in a business, as the higher the proportion of the value the higher the terminal. Terminal value gives back the owners of the company the value that the company can achieve if it grows and the value that the owners will receive if they continue to run the business themselves.

valuing a business acquisition opportunity case solution

valuing a business acquisition opportunity case solution

The terminal value is also a benefit for the owners of the successful growing business if they want to exit from the growing business to start a new venture if any new opportunity arise as they will get the return of the growth that the company has the ability to achieve and owners can pursue other opportunities, which also helps the industry and the economy of the country as new opportunities.

Case Synopsis

What’s the story?

It is expected that there are several ways of measuring business value when a firm wants to acquire another firm and the acquirer wants to acquire the business by paying the least amount and that the company which is targeted wants to obtain the maximum value that could justify the total assets and future earnings of the company.
In order to value the acquisition, the net present value method could be used by using the free cash flow model and in the free cash flow valuation the terminal value is used in order to incorporate the future cash flows which could provide the potential future benefits of the proposed investment plan with respect to investors.This case revolves around the possible ways of determining the terminal value in order to identify the projected future cash flows which could help the investors in order to identify the more realistic value of the acquired company.

he Solution Prescribed by the case and Major Findings

In order to evaluate the business acquisition opportunity case prescribed the net present valuation model and it is expected that the net present value of the proposed firm could be identified by using discounted free cash flow model. First of all, for this purpose the appropriate cost of capital is selected and it is expected that this cost of capital will determine the post-acquisition capital structure for the acquired firm and non-diversifiable risk of the acquired firm.
After identifying the suitable cost of capital the projected future cash flows from the proposed acquisition plan are identified and in order to identify the future value of the net cash flows, the terminal value of the project is also calculated upon the last years free cash flows and it is expected that terminal value of the project identified by five different methods. Each method will provide terminal value and terminal value is supposed to be value of the project’s expected cash flows beyond the explicit forecast horizon. It is necessary to identify the terminal value as it covers most of the project value in discounted cash flow valuation model………………

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