Corporate Finance - Mergers and Acquisition

Corporate Finance - Mergers and Acquisition

In this study, we have analyzed two restaurants i.e. GER in France and Santorini restaurant, and they are going to merge. There are the following sections that highlight the accounting for decision making

Merger occurs when two or more companies decide to pool their assets and form a new company. There is talk of acquisition when a company buys the shares or assets of other company to have control over it without carrying out the merger of their heritages. The ultimate goal is to create value. Many processes in Mergers and Acquisitions (M&A) caused by the need of entrepreneurs to develop and solidify its activities in a particular industry, trying to stay on and consolidate it on the market. However, others seek to gain profit in the short term and seek to acquire a company with the objective of increasing its value and then sell at a higher price. The common factor in both is the stimulus to add value to the acquired company. There are two main structures of mergers. Mergers by creating a new company- It consists the fusion of two or more companies to create a modern society, in which each contributes its complete heritage and rapid dissolution.

Answer # 1

The discounted cash flow is also abbreviated as DCF, is an important tool to calculate the value of a company. This calculation can be done when a company is going to merge with another, when they will be sold or internal performance analysis.

This methodology takes into account four key elements of the financial management of a company:

Estimated cash flow

Determination of the discount rate

Calculation of residual value

Calculation of company value

Basically, the value of a company in the FDC is measured by the amount of resources that will be generated in the future of business, brought to its value nowadays discounted over time and the risks associated with these estimates.

Net Present Values - Year by Year

Discounted Rate

8%

8%

8%

8%

 

1

2

3

4

 

2013

2014

2015

2016

Cash

390

414

457

564

Depreciation

286

305

340

368

Total

676

 

719

797

932

Less:

 

Capital Expenditure

408

390

405

412

Net Cash Flows

268

329

392

520

PVIF @ 8%

0.9259

0.8573

0.7938

0.735

Total Cash

Net Present Values

248.15

282.06

311.18

382.22

1,223.61

 

 

PV of CF

2,415.09

Note

All values are in £000

In the above table, the cash is added with the depreciation and then less the capital expenditure from the total amount. Due to which, we will obtain net cash flows for every year. After doing this computation, we will apply the discounted rate i.e. 8% on each net cash flow. As a result, we will obtain net present values year by year.

In this table, the value £2,415,000 indicates the present value of the cash flows in 2016. This is the projected value that is calculated for evaluation of business.

The values of Net Profit, Depreciation and Capital Expenditure have taken from the given table.

Formula of Present Value (PV) of Cash Flows:

Net Cash Flow = Net Profit + Depreciation - Capital Expenditure

PV of Net Cash Flow = Net Cash Flow - (Net Cash Flow x Present Value of IF).

Factors such as the high cost of capital, shortage of resources in their broadest sense and the ...