University Finance Project: DCF and Multiples Valuation of Companies

This discussion board post delves into the application of Discounted Cash Flow (DCF) and multiples valuation methods within the context of a finance project, specifically addressing merger and acquisition analysis. The author explains their choice to use both methods, highlighting the importance of carefully selecting inputs for each. The post contrasts the DCF approach, which focuses on expected cash flows, with the multiples method, which compares the target company to similar public firms. The student identifies potential inaccuracies in their preliminary valuation, including errors in calculating the discount rate, overlooking the impact of the terminal value's growth rate, and neglecting marketability and liquidity discounts in the comparable company approach. The analysis emphasizes the critical role of the terminal value and the implications of over or undervaluation in M&A deals. The post concludes with the importance of the accuracy of valuation methods for making informed investment decisions.

Running head: DCF AND MULTIPLES
DCF and Multiples
Name of the Student:
Name of the University:
Author Note:

1DCF AND MULTIPLES
Table of Contents
Merger and Acquisition Analysis:.............................................................................................1

2DCF AND MULTIPLES
Merger and Acquisition Analysis:
The merger and acquisition is an important part of a company, which plans to
expand its operations to existing lines of business or a new line of business with the
sole motive to create value for the stakeholders. This involves two parties, the target
company and the bidding company to form a part of a merger and acquisition deal.
The companies need to create a proper valuation for the target company as it
involves the use of the shareholders' wealth. And it can be done by various valuation
methods, which are discussing below.
The method of valuation which would be undertaken by me would be to value the
company on both the DCF and the multiples approach. This is because both the
analysis requires a certain set of inputs that needs to be carefully selected with
proper caution when undertaking the analysis. The DCF that is more based on the
expected cash flows, which can be generated from the project while the multiples
method in comparison with similar public firms. Thus we can calculate and provide
certain elements of risk for the DCF analysis at today's date, as per our expectations
of the future changes in the market. This would give a number, which would be a
certain amount. Thus, the accuracy of estimating the inputs would depend on the
experience in that particular field. If the merger is strategic, an aggressive method of
valuation can be done with DCF as the company is in the knowledge of the risk in
the industry, and DCF would be a suitable analysis. However, if the projections are
too aggressive or conservative can be analyzed by the multiples method. This would
provide the bidder to understand whether the estimates have been used very
aggressively and which factor input for the same should be reduced.
The part which was skipped during the DCF analysis is when the terminal value of
the company is calculated. The terminal value is an important segment of the
analysis requires estimation of the growth rate and the discount rate. The growth rate
which is used is constant was skipped during the initial analysis. I had also
miscalculated on the discount rate by incorporating a wrong set of risk factors. Thus,
this leads to a point which was also skipped in the analysis.
The comparable company approach is required for comparing the company, and in
the initial analysis the marketability and liquidity discount was not provided to the
company. This can lead to the overvaluation of the company and hence provide a
wrong investment decision.
The terminal value is the most important variable in either of the methods for valuation of the
company. An undervaluation can lead to the target company rejecting the offer, while an
overvaluation can lead the bidder company to lose value for the stakeholders.