Mergers and Acquisitions – The Relentless Pursuit of Synergy
A. Extracting Model Inputs
the proper NOI to be used as a basis for valuation =402 the average tax rate=39.47 total assets and investments for each year=216 after-tax profitability rates for each year and the average rate r=3.754 Calculate investment rates and the average rate b=0.162 the average growth rate g=10.53 supporting values 1 + h = (1 + g)/(1 + WACC) and (1 + h)n=0.9588
B. Building the Valuation Model
The total value of the Company = $2,955 million Subtracting total debt ($367 million in 1991) we get the equity value of the Company of $2,588 million Dividing by 137 million shares, we finally get the model stock price for 1991 of $18.9.
C. Studying the Valuation Sensitivity
Investment ratio b (+/- 20% at a step of 10%) Profitability rate r (+/- 20% at a step of 10%) WACC (+/- 20% at a step of 10%) Length of the period of supernormal growth n (5 to 15 years, at a step of 2.5 years)
D. Other Remarks and Conclusions
The model is most sensitive to WACC; the value depends on WACC in a non-linear way. That is linked to the expected investors’ return expectations
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