For our Course Project, you will produce a series of quality work products (deliverables) related to the due diligence process for the proposed acquisition of a target company (acquiree). In this role, you'll need to draw upon your understanding of the many topics covered in your graduate program and think like the chief financial officer (CFO) of a parent company considering an acquisition.

I chose Costco acquiring Kroger.

Valuation Estimates

You may recall from your earlier coursework that there are various methods for estimating the value of a company. You might also be aware that there are people in the industry who spend years acquiring the depth of experience for making solid estimates of the value of a business. Of course, your group will not have much time to do the task, so you'll need to rapidly research the financial data for your acquisition target (along with other available industry information that may be relevant) in order to make some quick, rough-order-of-magnitude (ROM) calculations, applying the different methods listed below for estimating valuation of the target acquisition company.

Determine the company's book value, or net asset value derived from account balances displayed on the balance sheet.

Research the company's market value. This is essentially the price that an asset would trade for in a fairly liquid business environment with an adequate number of buyers and sellers. In the case of a target acquisition that's a publicly traded company, this may be determined by looking up the current stock price for the targeted company.

Estimate the company's intrinsic value. This rather comprehensive estimate can be a challenge, as it ideally considers all aspects of a business, both tangible and intangible, and may be very different from the market value.

Calculate a capitalized value for the company. The earnings capitalization method financially discounts the annual earnings to determine the company's value and requires selection of a suitable capitalization (discount) rate. The basic formula for the earnings capitalization method is as follows.

Company Value = Annual Net Income / Capitalization Rate

Considering all of the above valuation methods, thoroughly explain what you believe the parent company should be willing to offer in consideration for the target company. You may also want to further discuss how the target company might provide value through additional synergies and opportunities to the parent company. For each of your researched and calculated estimates applying the various methods listed above, be sure to include an explanation and justification of all input values and applied parameters that you used.