Corporate Finance Report: Valuation, Mergers, and Investment Analysis

This report addresses a corporate finance assignment focusing on share valuation, investment decisions, and project analysis. The report begins by calculating the intrinsic value of a share using the price-earnings approach, dividend discount model, and net realizable value approach. It then discusses the perspectives of a takeover specialist and a director regarding valuation methods. The report further analyzes the use of equity approaches and discounted cash flow in merger decisions, emphasizing the superiority of the latter. Finally, the report evaluates a project using the net present value (NPV) approach, incorporating capital allowances, tax savings, and cash flows to determine its viability. The analysis concludes with a recommendation based on the positive NPV result.

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Corporate finance

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Table of Contents
Question 1..................................................................................................................................3
a).............................................................................................................................................3
b)............................................................................................................................................5
c).............................................................................................................................................5
Question 2..................................................................................................................................6
References..................................................................................................................................7

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Question 1
a)
The intrinsic value of the share is required to be calculated as that will be used in various
processes and also there will be effective decision making which will be made possible with
the help of this. There are various approaches which can be used in this calculation and they
are provided below:
Price earning approach:
This is the method in which the value of the share will be identified with the help of an
appropriate earnings multiplier (Almumani, 2014). This will be provided with the correct
value for the business to take decisions. The formula which will be used for the same is as
follows:
PE = Price / EPS
Particulars 2013 2014 2015 2016
DPS 0.1 0.12 0.12 0.13
Pay-out ratio 20% 20% 30% 25%
EPS 0.5 0.6 0.4 0.52
MPS 10 13.2 9 10
PE ratio 20 22 22.5 19.23077
Average earnings
multiplier
20.93
EPS 0.0536
Intrinsic value 20.93 * 0.0536
$1.122 per share
20.93 = Intrinsic value / 0.0536
Intrinsic value = 20.93 * 0.0536
= $1.122 per share

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Dividend discount model:
Under this method, there is the ascertainment of intrinsic value with the help of dividend and
the growth which is involved in relation to the same. The calculation is provided below:
Price per share = Expected Dividend / (Ke – g)
Ke = Rf + b (Rm – Rf)
Calculation of growth rate
Particulars 2013 2014 2015 2016
DPS 0.1 0.12 0.12 0.13
Growth 0.2 0 0.083333 0.283333
9.44%
Calculation of intrinsic value
Particulars Amount
Prospective EPS 5.36
Pay-out 25%
Expected dividend 1.34
beta 0.7
Rf 5
Rm 12
Ke 9.9

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Growth rate 9.44%
Intrinsic value
(cents)
291.3043
Intrinsic value
(Dollar)
2.913
Net realizable value approach:
The assets which are involved in the business will be considered and their net realizable value
will be taken into account to calculate the value of the share (Cristea, 2015).
Intrinsic value = realizable value of share - cost
Particulars Amount
Cash 1
PPE 12
Inventory 1.4
Account receivables 0.7
Others 0.7
Total realizable value 15.8
Bonds 5
Net asset value 10.8
Total shares 1
intrinsic value 10.8
b)
The takeover specialist is proposing the use of the discounted dividend model as with that
there is the ascertainment of correct value with the help of that. In that, the expected dividend
is considered and also the inflation will be taken into consideration to identify the correct
value (Gleason, Bruce Johnson and Li, 2013). In this perpetuity of the business is considered
and is a simple approach that is based on true concepts. The pay-outs are considered to be
constant for a long duration and due to that, this method is suitable. On the contrary, the
director of Hellcat is considering the use of the net realizable value of the assets in which the
value which will be realized by the takeover is taken into use. They are considering the
benefit which will be attained to them if all the assets and liabilities are set off. Takeover
specialist is considering the view of the investors as they are interested in dividends and
business is also required to pay that in a regular manner and due to that dividend model is
used (Lazzati and Menichini, 2015). The realizable value is not constant and consistency is

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not involved. They change with time and it is difficult to ascertain the correct value and
difficulty will be faced in making decisions.
c)
In the making of the merger decision, there are various aspects that are required to be
considered and for that equity and discounted cash flow approaches are used. The equity
approaches use the current value of the equity which is realizable in the current period and in
that the further benefits which will be attained in the coming period are not taken into
account. There is no consideration of the time value of money which makes it difficult to
make the best decision (Irons, 2014). In place of this, the discounted cash flow considers all
the cash flows which will be made in the coming period and they are discounted to the
current value by using an appropriate discounted rate. In this time value of money is involved
and the correct value of the merger by considering the future is determined which makes it
better to be used.
The dividend discount model is also used for the valuation of share in which also the time
value of money is involved but that is done in respect of the dividends only and total cash
flows are not covered. In the discounted cash flow approach there is the use of the total cash
flow and that provides the more appropriate valuation and therefore is considered above the
discounted dividend model for the valuation of shares in the merger.
Question 2
The projects which are required to be undertaken will be evaluated and for that, there is the
use of the net present value approach. In this, the present value of the net inflows is
calculated with the help of the cost of capital. In this, all the tax savings and payments are to
be involved and with that final result is obtained (Žižlavský, 2014). The decision will be
made on the basis of the final outcome and if the net present value is positive then the
acceptance will be made.
Particulars Year 1 Year 2
Capital allowance 75000 56250
Tax saving 7500 5625

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Particulars Year 0 Year 1 Year 2
Cash outflow -300000
Cash inflow 1050000 1102500
168750
Total
inflows
-300000 1050000 1271250

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Particulars Year 1 Year 2
Total inflows 1050000 1271250
Tax @ 10% 105000 127125
Tax payable in current year 52500 116062.5
Tax saving 7500 5625
Net payment of tax 45000 110437.5
Year Cash
inflow
Tax payment/saving Net inflows PVF @ 10.8% PV
0 -300000 0 -300000 1 -300000

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1 1050000 45000 1005000 0.902527 907039.71
2 1271250 110437.5 1160813 0.814555 945545.77
NPV 1552585.48
All the calculations are made and in that it is determined that there is a positive results which
is attained and due to that it is recommended that the project shall be undertaken. The same
will be beneficial for the business and will yield positive results.

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References
Almumani, M.A. (2014) Determinants of equity share prices of the listed banks in Amman
stock exchange: Quantitative approach. International Journal of Business and Social
Science, 5(1), pp.91-104.
Cristea, V.G. (2015) The necessity to introduce the accounting rules and fair value in the
conceptual framework. Procedia economics and finance, 26, pp.515-521.
Gleason, C.A., Bruce Johnson, W. and Li, H. (2013) Valuation model use and the price target
performance of sell‐side equity analysts. Contemporary Accounting Research, 30(1), pp.80-
115.
Irons, R. (2014) Enhancing the dividend discount model to account for accelerated share
price growth. Journal of Accounting and Finance, 14(4), p.153.
Lazzati, N. and Menichini, A.A. (2015) A dynamic approach to the dividend discount
model. Review of Pacific Basin Financial Markets and Policies, 18(03), p.1550018.
Žižlavský, O. (2014) Net present value approach: method for conomic assessment of
innovation projects. Procedia-Social and Behavioral Sciences, 156, pp.506-512.