3. Distinguish between stand-alone cash flows and merger cash flows. When should merger cash flows be used in valuation?

Compare Table 1 and Table 3, what are the assumptions used in preparing Table 1 and Table 3 respectively?

4. What are some market multiples commonly used in determine terminal value?

CASE 42 thods of Valution for Mergers and Acquisitions This note addresses the methods used to value companies in a merger and acquisi- tions (M&A) setting. It provides a detailed description of the discounted-cash-flow (DcF approach and reviews other methods of valuation, such as market multiples of peer firms, book value, liquidation value, replacement cost, market value, and com- parable transaction multiples Discounted Cash Flow Method Overview The DCF approach in an M&A setting attempts to determine the enterprise value or value of the company, by computing the present value of cash flows over the life of the company. Because a corporation is assumed to have infinite life, the analysis is broken into two parts: a forecast period and a terminal value. In the forecast period explicit forecasts of free cash flow that incorporate the economic costs and benefits of the transaction must be develo Ideally, the forecast period should comprise the interval over which the firm is in a transitional state, as when enjoying a temporary competitive advantage (i e., the circumstances where expected returns exceed required returns). In most circumstances, a forecast period of five or ten years is used. after The terminal value of the company, derived from free cash flows occurring the forecast period, is estimated in the last year of the forecast period and capitalizes This more focuses on valuing the company as a whole (ie the enterprise estimate of equity value can be derived under this approach by subtracting interest-bearing deb from enterprise value. allemative method An not pursued here values the using residual cash flows, which are computed as net ofinterest payments equity must be discounted at the cost ofequity and debt repayments plus debt issuances Residual cash flows This note prepared by Susan Chaplinsky, Professor of Business Administration, and Michael .schill, Professor Business Administration, with the assistance of Paul (MBA '99) Portions of Doherty this note draw on an of Mergers and Acquisitions" All rights earlier "Note Valuation Analysis Foundation. Charlottesville, VA. copyright o 2000 by the University of Virginia Darden school parrofahis reserved. To order copies, send an e-mail o sal transmitted in any form or by any may be reproduced, stored in a retriewal syntem, mused in a spreadsheet, or penniaion ofthe Dandem recording or School Foundation, Rey, 2/o9