We are to “rapidly research the financial data for your acquisition target (along with other available industry information that may be relevant) in order to make some quick, rough-order-of-magnitude (ROM) calculations, applying the different methods listed below for estimating valuation of the target acquisition company.”
1. Determine the company’s book value, or net asset value derived from account balances displayed on the balance sheet.
2. Research the company’s market value. This is essentially the price that an asset would trade for in a fairly liquid business environment with an adequate number of buyers and sellers. In the case of a target acquisition that’s a publicly traded company, this may be determined by looking up the current stock price for the targeted company.
3. Estimate the company’s intrinsic value. This rather comprehensive estimate can be a challenge, as it ideally considers all aspects of a business, both tangible and intangible, and may be very different from the market value.
4. Calculate a capitalized value for the company. The earnings capitalization method financially discounts the annual earnings to determine the company’s value and requires selection of a suitable capitalization (discount) rate. The basic formula for the earnings capitalization method is as follows. Company Value = Annual Net Income / Capitalization Rate
5. Considering all of the above valuation methods, thoroughly explain what you believe the parent company should be willing to offer in consideration for the target company. You may also want to further discuss how the target company might provide value through additional synergies and opportunities to the parent company. For each of your researched and calculated estimates applying the various methods listed above, be sure to include an explanation and justification of all input values and applied parameters that you used.
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