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Case study- A Financial Analyst at A Large Automobile Corporation

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Case study- A Financial Analyst at A Large Automobile Corporation

Credit score or rate

This refers to the reflection of a firm's creditworthiness. It is the reflection of a given

company's financial standing. This will be an essential consideration as it will help it to

understand the kind of risk that a given acquisition presents to its business model. A low credit

rating means that this venture risks while a higher rating indicates that the risks are few (Meliche

and Norton, 2016). This consideration should be a factor as it will help the enterprise to

overcome venturing into risky adventures that could cost it a fortune.

Borrowing

In order for the merger to materialize, the automobile company will be compelled to

borrow. My idea is that the company secures a long-term loan that will be serviced on a long-

term basis (Dalkır, Dalkır & Levit, 2019). The rationale behind this choice is that they are

serviced with low monthly payments, which are flexible for the company as it will need to adjust

its operations. The longer payment terms mean that the burden of payment will be significantly

reduced (Meliche and Norton, 2016). This reality comes with many comforts. This merger is a

big venture for the business, and thus the way it will be done requires a lot of care.

The impact of inflation

Inflation comes with an absurd increase in the prices of commodities. This impact will

directly impact on the chances of the merger happening. For instance, with the skyrocketing

prices of commodities, the new acquisition will also be sold at a significantly higher price than

before. As a result of the price increase, the automobile company will purchase the new company
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at a higher price of even postpone the merger is that it proves to be unfeasible. The significance

of the inflation factor is that it will lead to the company adjusting its merger plans to meet the

new market terms.

The yield curve and the term structure of interest

The yield curve implies all cash flows that are discounted in the yield to maturity, which

is an iterative examination. In simple terms, it is the average yield for maturity. The term

structure of interest is used to convert yield to maturity to rates that are continuously

compounded (Meliche and Norton, 2016). The relationship between the two is how they are used

to compare the values associated with each other.

Interest rates

Due to the higher price rates, the impact of this to the interest rates will be that they will

shoot up. Even if the technology is efficient, the high price valuation will mean that the

commodities will be purchased as a higher valuation than the previous one. Then the buyers will

have to part ways with more money than before.

Applying ratios for the merger

The essence of these rations is that they will become the automobile company to examine

the feasibility of the merger before it goes ahead. In this case scenario, the return of investment

ratios will be applied to examine the feasibility of the venture (DePamphilis, 2019). Also known

as the profitability ratios, they will be used to determine if the venture will bring in more returns

or losses. These facts are an essential consideration before the company goes ahead with the
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merger. Its executives must know and ascertain that whatever they are getting into will help

expand the company's profit margins.

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References

Dalkır, E., Dalkır, M., & Levit, D. (2019). Freeze-out mergers. The Review of Financial

Studies, 32(8), 3266-3297.

DePamphilis, D. (2019). Mergers, acquisitions, and other restructuring activities: An integrated

approach to process, tools, cases, and solutions. Academic Press.

Meliche, W. R. and Norton, A. E., 2016. Introduction To Finance: Markets, Investments, And

Financial Management, 16Th Edition. 16th ed. Wiley.