Reading 35: Mergers and Acquisitions - LOS i ～ Q1-3 class, comparable, concerning, statements

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1.Which of the following statements concerning valuation using comparable transaction analysis of takeover candidates is least accurate?

A)   An advantage is that estimates of value are derived directly from actual transactions, rather than from assumptions and estimates about the future.

B)   An advantage is that by using real transactions data as the basis of evaluation, the risk of future litigation concerning the proposed takeover price is reduced.

C)   A disadvantage is that since the approach uses data from actual transactions, it can be difficult to estimate the takeover premium.

D)   A disadvantage is that past mispricings will be carried over to the estimated value for the target.

2.Which of the following statements concerning valuation using comparable company analysis of takeover candidates is least accurate?

A)   An advantage is that the approach implicitly assumes that the market’s valuation of the comparable companies is accurate.

B)   An advantage is that data for comparable companies is usually easy to access.

C)   An advantage is that the estimates of value are market-based.

D)   A disadvantage is that it is difficult to incorporate merger synergies or changing capital structures into the analysis.

3.Which of the following statements concerning valuation using discounted cash flow analysis of takeover candidates is least accurate?

A)   A disadvantage is that the model is difficult to customize.

B)   An advantage is that the estimate is based on forecasts of fundamental conditions in the future rather than on current data.

C)   A disadvantage is that the model is difficult to apply when free cash flows are negative.

D)   A disadvantage is that discount rate changes over time can have a large impact on the valuation estimate.

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答案和详解如下：

1.Which of the following statements concerning valuation using comparable transaction analysis of takeover candidates is least accurate?

A)   An advantage is that estimates of value are derived directly from actual transactions, rather than from assumptions and estimates about the future.

B)   An advantage is that by using real transactions data as the basis of evaluation, the risk of future litigation concerning the proposed takeover price is reduced.

C)   A disadvantage is that since the approach uses data from actual transactions, it can be difficult to estimate the takeover premium.

D)   A disadvantage is that past mispricings will be carried over to the estimated value for the target.

The correct answer was C)

The fact that the approach uses data from actual transactions is an advantage, since it is not necessary to estimate the takeover premium. All of the other statements are correct as presented.

2.Which of the following statements concerning valuation using comparable company analysis of takeover candidates is least accurate?

A)   An advantage is that the approach implicitly assumes that the market’s valuation of the comparable companies is accurate.

B)   An advantage is that data for comparable companies is usually easy to access.

C)   An advantage is that the estimates of value are market-based.

D)   A disadvantage is that it is difficult to incorporate merger synergies or changing capital structures into the analysis.

The correct answer was A)

The fact that the approach implicitly assumes that the market’s valuation of the comparable companies is accurate is a disadvantage if the assumption is not correct. All of the other statements are correct as presented.

3.Which of the following statements concerning valuation using discounted cash flow analysis of takeover candidates is least accurate?

A)   A disadvantage is that the model is difficult to customize.

B)   An advantage is that the estimate is based on forecasts of fundamental conditions in the future rather than on current data.

C)   A disadvantage is that the model is difficult to apply when free cash flows are negative.

D)   A disadvantage is that discount rate changes over time can have a large impact on the valuation estimate.

The correct answer was A)

An advantage of the discounted cash flow valuation approach is that the model is relatively easy to customize. All of the other statements are correct as presented.