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Essay / Research Paper Abstract
This 5 page paper looks at a potential acquisition, considering the purchase from a financial perspective. The acquisition is considered by looking at the present value of the investment using the next three years free cash flow and the terminal value, and then assessing the market premium attached to the shares. The bibliography cites 4 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TEacmepv.doc
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Unformatted sample text from the term paper:
and there is also a known terminal value. This means it is possible to estimate a value for the investment purchasing a firm. This is undertaken by taking the future
free cash flows and discounting them to give a present rather than a future value. The firm currently uses a discount rate of 13%.
To discount the future cash flows the discount factor needs to be calculated, for the first year the factor of 1 is taken and discounted by 13% (1/(1+13%)1,
the cash flow can then be multiplied by this figure, to give the current value. The second year sees a similar process take place; however there is a different discount
factor. This time the factor from the previous year is taken and then discounted by 13%. There is a terminal value given, this is given for the end of
year three, so the same discount factor will be applied to the cash flow for year three and the terminal value. It is notable that it is assumed all cash
flows will be realised at the end of the relevant year. When these values for the different years are added together there
is a present value for the investment. This can be used to assess the value of the firm against the current share prices. Knowing that there is an equal amount
of debt and equity in the firm (a ratio of 1:1) 50% of the firm value is equity. With 1 million shares outstanding the total firm value (equity value) for
each share may be calculated, by taking the equity value and dividing it by the shares. It is usual for the market price to be worth more than the present
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