Question

When calculating the value of a firm for an acquisition of a target firm, how should the discount rate for calculating this value be determined?  If there are gains of synergy associated with this acquisition, how will the acquiring firm account for this in their valuation of the target?

Answer 1

Acquisition is where one comapany or firm takes a part of or all of the shares of another company or firm to take control of that firm. It is different from mereger.

The valuation of acquisition is essential factor . There are two types of values of acqusition :- book value and market value. There are different ways for this valuation and discounted cash flow method is the mostly used once . This approach initally involves calculation of cash flow to be generated by the target firm after acquisition then determination of sicount rate or we can say cost of capital of firm and the we get net present value. so, the discount rate can be calculated using this discout cash flow method.

Synergy is basically an idea that combined performance of two firms will be more than the sum of two seperate individual. There may be loss or gains from synergies. But, in case of gain from synergy there are cetain benefits both the firma enjoy. Like, the efficiency of firm is increased, the shareholder's worth increases as the prices of their share increases, the firms earnings is also increased. synergy proves profitable in this acquisition. The acquring firm may show synergy in their balance sheet as goodwill of the firm beacuase it particularly do not have any monetary value but is totally prpfitable.