FINANCE AND INVESTMENT

Finance and Investment



Finance and Investment Finance and Investment

Introduction

This assignment is about discussing the potential of Acem Estates Plc to buy an office building and what effects the buying decision creates on the market value of the company. We will assess the two financing options available before the company to see if it can utilize issuing new equity or a bond with a specified interest rate. We will discuss the implications of the financing decision and the acquisition of the office building to assess if it translates into any synergy for the company or not. The need to value companies is becoming increasingly necessary due primarily to increased mergers and acquisitions in recent years. We can define the valuation of the company as the process by which seeks to quantify the elements that constitute the heritage of a company, its business potential, or any other characteristic of that which could be valued. The measurement of these elements is not simple, involving many technical difficulties. Whenever the company makes a decision about buying a unit that adds to its value or creates synergies, it has to evaluate its market value as a whole unit post-acquisition.

While the valuation of a purchase is very crucial in nature, there have been some models available that have significantly contributed to reaching effective solutions whether or not to buy a building or to go for expansion. Let us first develop an understanding about the case in view so that we know how to value the company post-purchase. Indeed, the valuation issues occupy often the heart of the negotiations in the business combinations. There are many things that need an assessment before the company can actually decide to expand for a unit and in turn, careful business analysts need to evaluate each aspect of the business (Chenhall, Langfield, 2007, p. 266).

Discussion

Overview of Case:

Acem Estates Plc is an all-equity company that is currently facing the issue of buying an office building through either of the two financing methods available before it. The company's shares (45 million) are currently traded at £4 per share. The purchase of the office block is estimated to increase the earnings of the business by £8 million in perpetuity. There are two options available to obtain the needed finances to opt for the purchase: Either the company can issue bonds that have a coupon interest of 8% or issue new equity.

Question 1:

Increase in Company's Market Value through Acquisition and Financing

One of the main factors associated with the integration of a unit into a company is synergy which is the main reason a company goes for acquiring and expansion of its units. The influence of each of these two factors on the company's value can be negative. Examples include a merger or acquisition at a premium to its market value or the appearance of anergy (negative synergy) in the merger or acquisition. The effectiveness of the transaction in the circumstances is determined by the total change in value due ...