ch09 - Chapter 9 Alternative Approaches to Valuation to...

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Alternative Approaches Alternative Approaches to Valuation to Valuation 9 9 Chapter Chapter
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Chapter 9-2 Introduction to Valuation Aids evaluation of acquisition candidates Helps to set goals and benchmarks Framework essential to discipline valuation estimates Comparables (Companies, Transactions) Discounted Cash Flow (Spreadsheet, Formula) Use of multiple methods offers differing perspectives Valuation should be guided by a business economics analysis of the firm and its environment
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Chapter 9-3 Floor Value Book value Uncertain liabilities (e.g. pending litigation) may make value < book value Tangible book value Exclude intangible, e.g. goodwill Liquidation value More realistic than book value Fire sale prices of assets Not measuring the true earning power of the assets
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Chapter 9-4 Adjustment to Value Non-operating assets Do not contribute to the revenue, profit, or cash flow generation Control premium Marketability discount Minority discount
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Chapter 9-5 Comparables Approaches Comparables Analysis Use companies (or transactions) comparable in: Size and products Recent trends and future prospects Key ratios calculated for each company Key ratios are averaged for group Average ratios applied to absolute data for company of interest Applying ratios yields indicated market values Valuation judgments are made
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Chapter 9-6 Comparables Approaches Advantages of comparables Common sense approach Marketplace transactions are used Widely used in legal cases, fairness evaluation, etc. Allows valuation of private firms Limitations May be difficult to find companies comparable by key criteria Ratios may differ widely for comparables Different ratios may give widely different results
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Chapter 9-7 Comparable Transactions Example Valuation based on companies involved in similar merger transaction May be difficult to find truly similar transactions within relevant time period Illustration of comparable transactions for Exxon Mobil merger Average ratios suggest value of $56.8B for Mobil (deal was for $71.4B) May not take into account synergies and other unique factors
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Chapter 9-8 Comparable Transactions Example Comparable Transaction Ratios Amoco Texaco Conoco Average Total Paid/Sales 1.38 0.77 0.37 0.84 Total Paid/Book 3.00 2.79 2.29 2.69 Total Paid/Net Income 22.46 15.46 7.60 15.18 Premium Paid, % Target 22.3% 17.7% 0.0% 13.3% Premium Paid, % Combined 7.7% 6.3% 0.0% 4.7%
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Chapter 9-9 Comparable Transactions Example Application of Valuation Ratios to Mobil (Dollar Amounts in Billions) Mobil Value of Equity LTM Sales $63.0 $53.0 Book Value $19.0 $51.2 LTM Net Income $2.9 $43.8 Market Value Target* $58.7 $66.5 Market Value Combined** $233.7 $69.6 Average = $56.8 * Value of equity = market value target x (1 + average premium paid, % target) ** Value of equity = market value combined x (1 + average premium paid, % combined) - market value buyer Average Transaction Multiple 13.3% 4.7% 0.84 2.69 15.18
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This note was uploaded on 05/10/2011 for the course MGT D72 taught by Professor Chau during the Spring '11 term at University of Toronto.

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ch09 - Chapter 9 Alternative Approaches to Valuation to...

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