LOS i: Compare and contrast the three major methods for valuing a target company including the advantages and disadvantages of each.

Q1. 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)   A disadvantage is that the model is difficult to apply when free cash flows are negative.

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

Q2. 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)   A disadvantage is that it is difficult to incorporate merger synergies or changing capital structures into the analysis.

Q3. 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.

LOS i: Compare and contrast the three major methods for valuing a target company including the advantages and disadvantages of each. fficeffice" />

Q1. 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)   A disadvantage is that the model is difficult to apply when free cash flows are negative.

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

Correct answer is A)

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

Q2. 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)   A disadvantage is that it is difficult to incorporate merger synergies or changing capital structures into the analysis.

Correct answer is 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. Both remaining statements are correct as presented.

Q3. 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.

Correct answer is C)

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

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