Question

Does a mergers affect the cash flow, dividends, WACC and CAPM? If so, how and to what extend?

Answer 1

1: Effect of merger on Cash flow:

Cash flow statement usually prepared in three parts; Cash flow from Financing activities, Cash flow from investing activities and cash flow from operating activities, it depends on the merger that how it is financed and made investment during merger.

Cash Flow from Financing activities will get effected when merger has been done by either taking debt or selling of equity stake that is going to increase the cash inflow.

Cash Flow from Investing activities will get effected if a company investing into a target company for merger that will increase its investment in target company and it will result in cash outflow from investing activities, similarly any purchase of business units, plants or machinery during merger will increase investment in long term assets and it will affect the cash flow.

2: Effect of merger on Dividends:

In any merger normally the target company experiences gain due to competitive bids resulting it may receive a high premium from bidders that goes to target firms shareholder which may helps in share holders wealth maximization or high dividend payments.

After merger important policies of the company may change due to change in tom management that may include change in dividend policy of the company that effects dividend.

3: Effect of merger on WACC :

WACC is total cost of capital infused in the business it can be financed through outsiders (Debt) or owners capital ( Equity capital & Reserve and surplus) or any preferential  shares all of these sources are having different cost of financing, Wacc takes weighted average of all the financing components and their costs involved in capital structure of the business when any MERGER happens it effects the capital structure of the company resulting WACC of the company get effected.

4: Effect of merger on CAPM :

Generally CAPM is used to calculate cost of Equity of a firm that considers Risk Premium and beta of the stock of the company.whenever MERGER happens between two companies it effects the risk factors associated with both the companies gating merged resulting it will effects their CAPM and Cost of Equity.