EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Question
Chapter 19.1, Problem 2CC
Summary Introduction
To discuss: Whether the acquisition price is a good investment opportunity.
Introduction:
The primary way to estimate the firm’s value can be determined by valuating the comparable. Multiples used in valuing the comparable are ratio of enterprise value to sales and price-earnings ratio.
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When using the fair value method, we adjust the reported amount of the investment for changes in fair value after its acquisition. How is the change in fair value reflected in the income statement?
Choose the correct. When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition?a. The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met.b. The fair value of the contingent consideration is expensed immediately at acquisition date.c. The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners’ equity is recognized.d. The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm.
A common mistake that can occur in valuing a target would be:
Group of answer choices
Applying the acquirer’s growth rate in revenues to the target’s sale levels.
Applying the acquirer’s cost of capital in the target’s evaluation equation.
Applying the acquirer’s price-earnings ratio to the target’s earnings.
All of these choices.
Chapter 19 Solutions
EBK CORPORATE FINANCE
Ch. 19.1 - Prob. 1CCCh. 19.1 - Prob. 2CCCh. 19.2 - Prob. 1CCCh. 19.2 - Prob. 2CCCh. 19.3 - What is a pro forma income statement?Ch. 19.3 - Prob. 2CCCh. 19.4 - Prob. 1CCCh. 19.4 - Prob. 2CCCh. 19.5 - Prob. 1CCCh. 19.5 - Prob. 2CC
Ch. 19.6 - Prob. 1CCCh. 19.6 - Prob. 2CCCh. 19 - Prob. 1PCh. 19 - Prob. 2PCh. 19 - Prob. 3PCh. 19 - Prob. 4PCh. 19 - Under the assumptions that Idekos market share...Ch. 19 - Prob. 6PCh. 19 - Prob. 7PCh. 19 - Prob. 8PCh. 19 - Prob. 11PCh. 19 - Calculate Idekos unlevered cost of capital when...Ch. 19 - Using the information produced in the income...Ch. 19 - How does the assumption on future improvements in...Ch. 19 - Approximately what expected future long-run growth...Ch. 19 - Prob. 16P
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- When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition?a. The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met.b. The fair value of the contingent consideration is expensed immediately at acquisition date.c. The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners’ equity is recognized.d. The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm.arrow_forwardWhat is the limitation of payback method as a form of investment appraisal?arrow_forwardIs this statement true or false? And why? The investment in a subsidiary (SME) can be justified when measured against MNC investment standards, as long CSR standards are met too.arrow_forward
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