Company A is considering acquiring company B. The two companies are in different, but not totally unrelated, industries. You are hired by company A to make a positive or negative recommendation about the acquisition. In preparing your recommendation you consider using the Discounted Cash Flow (DCF) model as well as the Real Options model to assess the value of the potential acquisition. You also plan to use the CAPM to assess and value the risk of the acquisition. Explain how the DCF model and the Real Option model can each be used to value the acquisition. Under what circumstances would the Real Option model provide a better approach to value the acquisition than the DCF? Explain.

Finally, discuss how the risk of the acquisition can be assessed via the CAPM model? Comment on the advantages and disadvantages of using the CAPM to the value the acquisition.