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A Review of Acquisition Valuation Models
Author(s) -
FRANKS J. R.,
MILES R.,
BAGWELL J.
Publication year - 1974
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1974.tb00849.x
Subject(s) - valuation (finance) , cash flow , earnings , discounted cash flow , economics , econometrics , normative , actuarial science , financial economics , earnings growth , free cash flow , terminal value , cash flow forecasting , finance , philosophy , epistemology
The article critically examines two methods of acquisition valuation. The first concentrates on a comparison of the earnings per share of the combined companies with that of the acquiror alone on a present value basis. The second method is discounted cash flow model which is based on several established normative models of share price valuation. The article concludes that because of the difficulties in computing an accurate weighted average cost of capital for the combined group and the differences in cash flow and reported earnings, the earnings per share approach is not valid, and therefore the cash flow approach is to be preferred and adopted.