1. The Weighted Average Cost of Capital (WACC) Approach: This method offers a wide range of advantages. For instance, the Capital Assets Pricing Model (CAPM) is employed in the calculation of the Cost of Equity. Thus, the discounted rate of 7.58 percent used in figure 1.12 Appendix is likely to be precise. The total value of the firm is $4.73 billion. Nonetheless, in view of the probabilities of forecasting errors in the estimation of cash flows, the degree of precision does not guarantee an accurate result. Another drawback of the approach would be the failure to allow for the impacts of real options available to management on future cash flows. Hence, this method is considered as an alternative for crosschecking. The assumptions are the dividends grow constantly in perpetuity at 3 percent and the debt ratio is also constant at 28.1 percent. For further analysis, please refer to item 2a and 3c in the Appraisal. 2. The EBIT Multiples Approach: Under this methodology, the debt-equity ratio was not required. Thus, the value of the firm is approximately $4.93 billion after liquidity discount was taken into account. This yields an insignificantly different result compared to the result under the WACC method. However, since the average EBIT multiples strongly depend on the comparable companies in the industry, reliable information is less likely to be available in practice. Therefore, another approach is employed. 3. Adjusted Present Value (APV) Approach: The APV method is more complicated than two methods mentioned earlier inasmuch as it takes account of unlevered value of the firm and the interest tax shield. Recent complexity of the method notwithstanding, APV provides management with an explicit valuation of interest tax shield and an assumption of constant debt-equity ratio is unnecessary. According to figure 1.10, the total value of the firm before synergies is $5.02 billion. Nonetheless, this method ignores the costs of financial...
Please join StudyMode to read the full document