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Merger and Acquisitions (SFM)

Merger and Acquisitions (SFM)

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Published by ejjazaccountant3601
Merger and Acquisitions (SFM)
Merger and Acquisitions (SFM)

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Published by: ejjazaccountant3601 on Apr 15, 2010
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06/26/2014

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In this topic we will discuss about:
 .Data Verification Sources.Notice.Essential Guidelines.Discussions and cases about Merger and business valuations
Data Verification Sources
 
1 = Theories and problems in financial management by M.Y
 
khan and P.K Jain third edition2 = Wikipedia the free encyclopedia (http://en.wikipedia.org/
 
)3 =
www.investopedia.com 
4
= Financial Management ACCA paper F9 by Kaplan5 = CA module F Paper F 19 Business Finance Decisions
 The term merger refers to the combination of two or more firms. The analysis of financial aspects of merger covers three aspects1.
 
Determining the firm¶s value2.
 
Financing techniques for merger3.
 
Merger as capital budgeting decisionLet us discuss each of them one by one
1.
 
Determining the firms value
I
t is first step in merger it is difficult as different factors are considered inconjunction with each other and book value itself is not an effective measureitself as it is useful in specific situations. The importance of appraisal valuedepends upon methods used to calculate it and nature of the business. The
 
 market value is key element in evaluating the firm¶s worth particularly in largelisted corporate firms. Another important criterion for merger decision is EPS.However worth of a firm should not be determined on basic of a single approachand a single figure but within a range after considering all the alternativeapproachesThe EPS basic of determining the value of firm is based on the effect of mergeron the future EPS, that is, the EPS of the merged firm (EPS
m
) see this procedureand its effectEPSm = EATA + EATT / NA + NTWHERE:EAT
A
= Earning after tax of the acquiring firmEAT
T
= Earning after tax of the target firmN
A
= Number of equity shares outstanding of the acquiring firmN
T
= Number of equity shares of the target firmMarket value of the merged firm V
m
= EPS
m
* P/E
A
 Total gain from merger:V
m
= (V
A
± V
T
)WHERE:V
A
= EPS
A
* P/E
A
 VT = EPS
T
* P/E
T
 Gain for Acquiring (G
A
) and Target (G
T
) firmG
A
= [Post-merger value of firm A less Pre-merger value of firm A]G
A
= [Post-merger value of firm T less Pre-merger value of firm T]
App
roaches for valuations
There are three main approaches for business valuations mentioned under1.
 
DVM based on the return paid to the share-holders=
0
= [D
0
(1+g)] / [(K 
e
 g)]
 
 
 2.
 
I
ncome/earnings based - based on the returns earned by the firma.
 
PE ratio method = value of the company = total earning (NP after tax) * P/E ratiob.
 
Earning yield=value per share = EPS * (1  / earning

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