Scribd Logo
Upload

Welcome to Scribd!

  • $ Millions: Less: Transaction Costs

    Uploaded by

    Goodenough
    7 views2 pages
    The document presents a discounted cash flow valuation of a company called Chip Hive plc that is being acquired. It shows the projected cash flows for the first 4 years at growth rates of 6% and 3% respectively, discounted at a rate of 9.7%. The net present value is calculated to be $1000.25 million. After accounting for transaction costs and the existing market value, there is an estimated value gain of $578 million from the acquisition, more than doubling Chip Hive's current market capitalization. It comments that VEX Tech, the acquiring company, should review whether it has overestimated synergies or underestimated business risks and the appropriate discount rate.

    Original Description:

    calculation using black scholes method

    Original Title

    Question 1a

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    The document presents a discounted cash flow valuation of a company called Chip Hive plc that is being acquired. It shows the projected cash flows for the first 4 years at growth rates of 6% and 3% respectively, discounted at a rate of 9.7%. The net present value is calculated to be $1000.25 million. After accounting for transaction costs and the existing market value, there is an estimated value gain of $578 million from the acquisition, more than doubling Chip Hive's current market capitalization. It comments that VEX Tech, the acquiring company, should review whether it has overestimated synergies or underestimated business risks and the appropriate discount rate.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    7 views2 pages

    $ Millions: Less: Transaction Costs

    Uploaded by

    Goodenough
    The document presents a discounted cash flow valuation of a company called Chip Hive plc that is being acquired. It shows the projected cash flows for the first 4 years at growth rates of 6% and 3% respectively, discounted at a rate of 9.7%. The net present value is calculated to be $1000.25 million. After accounting for transaction costs and the existing market value, there is an estimated value gain of $578 million from the acquisition, more than doubling Chip Hive's current market capitalization. It comments that VEX Tech, the acquiring company, should review whether it has overestimated synergies or underestimated business risks and the appropriate discount rate.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 2

    Question 1

    (a) Cash flow in year just completed = £60m


    Growth rate for first 3 years = 6% per year.
    Growth rate from Year 4 onwards = 3%
    Discount rate = 9.7
    $ Millions

    year Growth rate(1+r)^n Cash flow after tax


    0 0 0
    1 6% 63.6
    2 6% 67.4
    3 6% 71.5
    4 3% 73.6

    The PV (at Year 3) of the future cash flow from Year 4 onwards would be:

    73.6/ (0.097-0.03) = 1098.5


    DCF Valuation:

    63.6/ (1.097) ^1 + 67.4/ (1.097) ^2 +71.5/ (1.097) ^3 +1098.5/ (1.097) ^3 = $1000.25m


    Comment on value gain: $m
    Post-acquisition market value of Chip Hive plc 1000.25
    Less: Transaction costs (2.25)
    Net post-acquisition value Of Chip Hive 998.00
    Less: Existing market value of Chip Hive = 100m shares x $4.20 (420.00)
    Estimated value gain arising as a result of the takeover 578.00

    The synergy brings a very large value gain, more than doubling the current market capitalization
    of Chip Hive plc. It may be worthwhile for VEX Tech, plc to review whether it is
    (i) over-estimating the value of the synergies and/or
    (ii) Underestimating the business risk and the appropriate discount rate for evaluation.

    You might also like