Question

The proper way to determine an appropriate price for acquiring a firm is to... a) find...

The proper way to determine an appropriate price for acquiring a firm is to...

a) find the current market price of the target company's stock, multiply this by the number of shares outstanding to get market capitalization, or market value.

b) project the additional cash flows resulting from the purchase, discount them back to PV using a cost of capital, and then add them up.

c) use the target company's current price/earnings ratio and multiply this by the company's current net income.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The proper way to determine an appropriate price for acquiring a firm is to

b) project the additional cash flows resulting from the purchase, discount them back to PV using a cost of capital, and then add them up.

Explanation: We are interested in what the present values of the future expected cash flows are while valuing a company. So we are to calculate the PV of the future cash flows using the cost of capital, add them up and then arrive at the total price at which you can acquire the target company.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Wildcat Corporation recently disclosed the following financial​ information: ​ Earnings/revenue ​$2 comma 279 comma 093 Assets...
Wildcat Corporation recently disclosed the following financial​ information: ​ Earnings/revenue ​$2 comma 279 comma 093 Assets ​$9 comma 800 comma 000 Liabilities ​$1 comma 642 comma 288 Shares outstanding 686 comma 880 Market price ​$30.00 per share Calculate the​ price-to-book ratio, the​ price/earnings ratio, and the book value per share for each of the following separate​ scenarios: a. Based on current information b. Earnings fall to ​$1 comma 519 comma 395 c. Liabilities increase to ​$3 comma 107 comma 971...
Show calculations please The Carmi Corporation is considering acquiring the Carshena Corporation. The data for two...
Show calculations please The Carmi Corporation is considering acquiring the Carshena Corporation. The data for two companies are as follows: Carshena Corp. Carmi Corp. Total earnings................................................. $500,000 $2,000,000 Number of shares of stock outstanding.......... 210,000 1,000,000 Earnings per share.......................................... $2.50 $2.00 Price-earnings ratio (P/E)............................... 16 20 Market price per share.................................... $40 $40 a.   Carmi Corp. is going to give Carshena Corp. a 50 percent premium over Carshena Corp.’s current market value. What price will it pay? b.   At the price...
A company needs $35,943,750 to finance a major project in the company. The company expects that...
A company needs $35,943,750 to finance a major project in the company. The company expects that next year’s earnings from current operations and the additional earnings from the new project will be a total of $45,650,000. The company currently has 5,075,000 shares outstanding, with a price of $17.75 per share. The company’s management is assuming that any the additional shares issued to finance the project will not affect the market price of the company’s common stock. Calculate the following: If...
Hamlin Steel Company wishes to determine the value of Craft​Foundry,a firm that it is considering acquiring...
Hamlin Steel Company wishes to determine the value of Craft​Foundry,a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the​constant-growthvaluation model. ​Craft'sstock is not publicly traded. After studying the required returns of firms similar to Craft that are publicly​traded,Hamlin believes that an appropriate risk premium on Craft stock is about 9​%.The​ risk-freerate is currently 3​%. ​Craft's dividend per share for each of the past 6 years is...
The Jenkins Co. is considering a project which requires the purchase of $315,000 of fixed assets....
The Jenkins Co. is considering a project which requires the purchase of $315,000 of fixed assets. The net present value of the project is $20,000. Equity shares will be issued as the sole means of financing the project. What will the new book value per share be after the project is implemented given the following current information on the firm? Number of shares outstanding 50,000 Book value $500,000 Market value $720,000 Net income $45,000 Return on equity 0.09 Price-earnings ratio...
As a consultant to Kmart, you have been asked to compute the appropriate discount rate to...
As a consultant to Kmart, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. The target capital structure weights are equal across debt, preference shares, and ordinary shares. You have determined the market value of the firm’s current capital structure (which the firm considers to be its target mix of financing sources) as follows: To finance the purchase, Kmart will sell 10-year bonds with a $1000...
PLEASE ANSWER!! NEED DONE QUICKLY!!! I WILL RATE AND RESPOND!    The Jeter Corporation is considering...
PLEASE ANSWER!! NEED DONE QUICKLY!!! I WILL RATE AND RESPOND!    The Jeter Corporation is considering acquiring the A-Rod Corporation. The data for the two companies are as follows: A-Rod Corp. Jeter Corp. Total earnings $ 660,000 $ 3,500,000 Number of shares of stock outstanding 275,000 1,750,000 Earnings per share $ 2.40 $ 2.00 Price-earnings ratio (P/E) 15 18 Market price per share $ 36 $ 36 a. The Jeter Corp. is going to give A-Rod Corp. a 50 percent...
Consider two firms that both have the same earnings per share of $10.00. The first firm...
Consider two firms that both have the same earnings per share of $10.00. The first firm Barley Inc. is a mature company with few growth opportunities. It has 3 million common shares outstanding with a current market price per share of $30. The second firm Marvel Inc. is a younger company with more lucrative growth opportunities. Marvel has 6 million shares outstanding with a current market price per share of $40. Now assume that Marvel acquires Barley by using a...
Peet's Coffee is considering a new project. It has a target capital structure of 50% debt,...
Peet's Coffee is considering a new project. It has a target capital structure of 50% debt, 45% equity and 5% preferred stock. Peet's has noncallable bonds outstanding, with a coupon rate of 8.5% (paid semiannually), that mature in 16 years with a face value of $1,000, and a market price of $985.45. The yield on the company's current bonds is a good approximation of the yield on any new bonds they issue. The company can sell shares of preferred stock...
. Indicate whether the following statements are true or false: (1 point each for a total...
. Indicate whether the following statements are true or false: (1 point each for a total of 12 points) (a): Financial decisions have to do with allocating capital,and affect the assets side of the balance sheet of the firm. (b): Real Assets are those assets of the firm that are needed for its operations and play a role in generating income for the firm. (c): Capital markets are said to be efficient if market prices reflect all available information. (d):...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT