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Lecture Investment analysis & portfolio management - Chapter 31

After studying this chapter you will be able to understand: Chossing a discount rate, mergers and acquisiitions, venture capital, discount rate for project appraisal, arguments for and against mergers and acquisitions, methods of financing a merger, strategy and tactics,. | Investment Analysis and Portfolio management Lecture: 31 Course Code: MBF702 Outline RECAP CHOSSING A DISCOUNT RATE MERGERS AND ACQUISIITIONS VENTURE CAPITAL Discount Rate for Project Appraisal No Changes in Financial or Business Risk. Current WACC may be used as discount rate. Questions are likely to be focused on how the project is to be financed to keep the WACC constant. Cost of project & increase in earning (equity) will be given. Calculate revised MV by dividing increased earning with WACC & compare with old MV to calculate NPV. Business Risk changes / Financial Risk may or may not change Adjusted Present Value (APV) Risk adjusted WACC (WACC) Financial Risk Changes & Business risk remains the same Traditional Theory Since traditional theory is not based on any formulae increase / decrease in Ke & Kd will be provided (due to gearing changes) Objectives MERGERS AND ACQUISITIONS To appreciate alternative strategies for long-term growth; To understand the arguments for and . | Investment Analysis and Portfolio management Lecture: 31 Course Code: MBF702 Outline RECAP CHOSSING A DISCOUNT RATE MERGERS AND ACQUISIITIONS VENTURE CAPITAL Discount Rate for Project Appraisal No Changes in Financial or Business Risk. Current WACC may be used as discount rate. Questions are likely to be focused on how the project is to be financed to keep the WACC constant. Cost of project & increase in earning (equity) will be given. Calculate revised MV by dividing increased earning with WACC & compare with old MV to calculate NPV. Business Risk changes / Financial Risk may or may not change Adjusted Present Value (APV) Risk adjusted WACC (WACC) Financial Risk Changes & Business risk remains the same Traditional Theory Since traditional theory is not based on any formulae increase / decrease in Ke & Kd will be provided (due to gearing changes) Objectives MERGERS AND ACQUISITIONS To appreciate alternative strategies for long-term growth; To understand the arguments for and against mergers and acquisitions; To describe alternative strategies and tactics of mergers and acquisitions; To discuss the variety of methods of financing mergers and acquisitions; To discuss various defences against takeovers; To discuss other methods of financial restructuring. ARGUMENTS FOR AND AGAINST MERGERS AND ACQUISITIONS Organic growth or external growth If the strategy of a company is for long-term growth then this can come from: organic growth − development of new projects by the firm financed by retentions or new debt/equity; or external growth − buying existing projects by acquiring another business. Advantages of acquisition Speed – often quicker/more immediate than organic growth; Entry costs – if the cost of entering a new business is high it might be better to acquire such a business as a going concern; Barriers to entry – this may mean that acquisition is the only method of entry to a new area of business; Risk – organic growth may be riskier than acquiring an existing .