Question

(CO A) Define operating synergies.

What are the two types of operating synergies?

Answer 1

Enterprise Valuation provide an effective way to evaluate and compare performances of companies as it calculates total value of a company which is a sum of Market Capitalization and total Debt(including both short term and long term) minus cash and cash equivalents.Cash is Substracted as cash is available to the owners.it is a more holistic method of calculating the value of a company as includes total debt and Market Capitalization than Market Capitalization Value which only includes total stock value.

Enterprise Multiple=EV/EBITDA(Earnings before Interest,Taxes,Depreciation,Amortization).

It Shows How many Times Enterprise value is of Earnings from Operations(EBITDA).A high value of Enterprise multiple shows that the company has High Market Value.Hence Consistent Customer Base,High Liquidity of shares,high Creditability and growth prospects which is great for the investors.

Its Benefits-

1.It Helps in Comparing and evaluating performance of companies which have different degrees of financial leverage.

2.As it Includes Debt It is Quite Useful for Mergers And Acquisitions As It Provides the Total value of the company which is acquired by the new owner as it also includes debt but excludes cash and cash equivalents as it available to new owner.It Helps in accessing all the liabilities of the company.

3.It helps evaluating Capital-Intensive Businesses With High Depreciation.

4.It Helps Investors,brokers and analysts acting on their behalf in making Informed Investment Decisions as it provides total value of the company and shows it Market Value and liquidity of shares,The use of financial leverage,its Creditability,Growth prospects.

5.It Helps in Negotiating Prices With Potential Buyers in case of mergers and acquisitions.

6.It Helps The Management In Evaluating Market Capitalization,Financial Leverage and Cash Available to the company.