Mrc, Inc. (a)

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Case summary:

MRC, Inc. is a Cleveland based manufacturing company specialized in power brake systems for trucks, buses, and automobiles; industrial furnaces and heat treating equipment; and automobile, truck and bus frames. As till 1957 most of MRC's sales were made to less than a dozen large companies in the automotive industry, it was exposed to the risk inherent in selling to a few customers in a very cyclical and competitive market. To minimize the risk and to explore new business opportunity MRC's management decided to diversify their business operation. After their fifth successful acquisition, the CEO of MRC Archibald Brinton faced with a dilemma of whether to buy American Rayon, Inc.

Topics which are covered in this case are:
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Q3. Should MRC acquire ARI at the price now available? In answering this question, consider (at least) the following two alternatives frameworks:

• Valuation based on projected cash flows, using a discount rate of 15%;

• A situation where MRC must liquidate ARI immediately.

Ans. We know, business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is usually used by financial market participants to determine the price they are willing to pay or receive to acquire a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes.

One of the most common used methods of valuation of a business is "Discounted Cash Flow method". This method estimates the value of an asset based on its expected future cash flows, which are discounted to the present (i.e., the present value). This concept of discounting future money is commonly known as the time value of money. For instance, an asset that matures and pays $1 in
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