{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

2-7 - 2/7 V Introduction to DCF Valuation and valuing...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
2/7 V. Introduction to DCF Valuation and valuing synergies Readings: Rosenbaum & Pearl "Discounted Cash Flow Analysis" Investment banking Just Synergy Estimation Example o Very common to announce synergies Convince shareholders not to trash their stocks Show they can do some great things for target company o Example: Kraft's hostile takeover attempt of Cadbury See excel spreadsheet example o Takeaways Conclusion reached: Even if we grant them their synergies and if we say they last forever, it is only worth 2.22 more for synergies At 8.50-they clearly overpaid because they gave away all of the synergies Only worth 8.00 There are a lot of assumptions involved What do they mean and how do they affect the result? What is wrong with a large term growth rate into perpetuity? o Ex. See spreadsheet Discount rate =.1, term growth rate =.09 Denominator in TV is getting super small This isn't reasonable o If the company grows at 9% forever… Economy grows 4-6% in the long term The company will eventually become the whole economy This is the limit Obviously a company cannot do this o RULE Terminal growth rate cannot be greater than 6% Prevent company from turning into entire economy o Have to predict how much the company will growth with the economy It can either grow with economy or less In long run, you cannot get more than 4-6% in the long run Do not do terminal value until you get to steady state! o You're valuing the company for forever o First question to ask before model: When is this company going to grow at the rate of the economy? Ex. Company going globally Wait until they get to the right place because before that they can grow at a rate larger than the economy Ex. Paper company Probably already in steady state May be less than economy Paper company in today's quickly advancing paperless world 0%? o High growth companies-estimate out 20 years
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
What's wrong with using multiples?
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}