Title: A Primer on Merger and Acquisition Cash-Flow Valuation
Abstract: This chapter provides an overview of the basics of valuing mergers and acquisitions (M&A) using discounted-cash-flow methods. Discounted-cash-flow methods such as the zero-, constant-, and variable-growth methods are widely used to estimate the value of the firm. The present value of enterprise cash flows often is referred to as the enterprise value of the firm. Valuation estimates based on equity cash flows are called the equity value. A common technique for estimating equity value is to deduct the market value of the target firm's debt and other nonequity claims from its enterprise value. This chapter begins with a brief review of rudimentary finance concepts, including measuring risk and return, the capital asset pricing model, and the effects of operating and financial leverage on risk and return. The cash-flow definitions, free cash flow to equity (equity value) or to the firm (enterprise value), discussed in this chapter are used in valuation problems in subsequent chapters. The enterprise or FCFF method and the equity or FCFE method are illustrated in the chapter using three cash-flow growth scenarios: zero-growth, constant-growth, and variable-growth rates. The chapter also outlines the valuation approach, which focuses on cash flow generated from net operating assets. The chapter concludes with an illustration of the commonly used enterprise method to value a firm's operating and nonoperating assets and liabilities to determine equity value.
Publication Year: 2010
Publication Date: 2010-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
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