Case Study on Management 2022

MANAGEMENT 1
MANAGEMENT

MANAGEMENT 2
The discount rate the company should use when considering the mergers and acquisitions is
the cost of equity of the existing company or the target company. The discount rate depends
upon the cash flow stream that the company is measuring. If the existing company is
considering the buying equity or owners of the target company, then the discount rate shall
have to be adjusted for the additional risks incurred from the use of these funds. When the
company choses to use the Capital Asset Pricing model, then the company will have to
determine the beta coefficient (Matt, 2020).
The appropriate weighted average Cost of capital would depend upon some basic factors,
such as the following:
1. The amount of the business risk of the cash flows that the new company would entail
in the years to come?
2. Appropriate financial structure of the company after the merger and acquisition has
taken place.
In the above factors, there are basically two scenarios. The first being the scenario wherein
the target company and the acquirer belongs to the same industry and when they do, they
have the similar business risk. In such a case, the company would have an optimal financial
structure. Since the business risk would be similar, then WACC could also be used for the
purposes of valuing the merger of the cash flows. In case, the target company and the
acquirer belong to the different industries, then the business risks would also be different, an
example of which would be a pharmaceutical company which acquires an airline company.
Then the business risks shall be different, their assets, collateral, debt paying abilities would
also be very different. In such of the cases, the acquiring company would realise the value
from the transaction from the target in a manner that is optimal. Hence, in such case, WACC
shall be calculated using the business risks and the financing through which the company
shall be acquired.
While choosing the appropriate discount rate to determine the present value of the cash flows
of the target company, few of the adjustments will have to be made to the approaches on the
basis of individual judgments. The main concern in finding the WACC is the reflection of the
business as well as the financial risks of the cash flows of the target company. This is mainly
due to the fact that there shall be a different capital cost after the two companies have merged
connected with the operating and the financial synergy. The determination of the appropriate