ACQUISITION

Valuation of Target Company

Executive Summary

Target Company

Overall Value of Target Company

$8,456,200,000

10% Confidence Interval

$7,610,580,000-$9,301,820,000

338,248,000 shares outstanding

$25 target value per share

10% confidence interval in share price

$22.50 - $27.50

Our Investment banking team used fundemental financial and mathematical assumptions to derive our target companies value. We first calculated the cost of equity using the capital asset pricing model( CAPM). Secondly we estimated the cost of debt basing our decision on current market rates and conditions. We then structured the companies capital by using the weighted average cost of capital(WACC). To derive a clear picture of future cash flows we researched industry and market trends. From this research we were able to compare similar companies and estimate a growth rate for our targeted company. With cash flows accounted for we calculated the net present value (NPV) to test the companies profitability. To give your management team a hurdle rate and a ability to compare projects we calculated the internal rate of return(IRR). Our final assement was generating a stock price. Using fundemetal suppley and demand theory we calculated the price using a price divided by earnings(P/E) valuation model.

Cost of equity

5.11%

Cost of debt

3%

WACC

3.53%

NPV

$181,217

IRR

9%

Target Share Price

$25

Valuation of Target Company

Introduction

A large food conglomerate is seeking to acquire a company that is a lead producer in the confectionary (candy) industry. This report presents our calculated valuation of the target company. Using “mathematical” assumptions we will give an investment appraisal by using multiple valuation models.

Cost of Equity

Using the CAPM model, we find our cost of equity to be 5.11% Our calculation of the asset pricing model states that the risk premium of an asset equals its beta times the market risk premium.

The CAPM model assumes various aspects of investors and markets were kept in mind while calculating the cost of equity. These are described as follows.

Individuals are risk averse and maximize the utility of their wealth in the coming period.

Investors have homogeneous expectations about the variance-covariance matrix and expected returns on assets.

The return of the assets is distributed normally.

Existence of perfect and efficient markets. The information is free and available instantly to all the market players.

The supply of assets is fixed.

Cost of equity=Risk free rate+(Market risk premium)*Beta

Risk free rate 0.93%: We found our risk free rate by using the three month treasury bill. (Appendix: Table1)

Market Rate 2.6%: We calculated the market rate. We took the average return of the twelve companies for the purpose of comparison.

Market Risk Premium 1.7%: Our calculation by the asset pricing model (CAPM) states that the risk premium of an asset equals its beta times the market risk premium. Market risk premium is the difference between Market rate and Risk free rate. The Market premium of 1.7% means that the investors who are investing in the market will get 1.7% excess over the risk free rate as a compensation for the extra risk.

Beta 2.5: We chose to use the pure play method to find our beta. The pure play method derived the best estimate for ...