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Essay example - Mergers and aqcuisition
Pages 11 (2761 words)
The discount rate is the assessment used in accounting procedures to find out the current price or significance of potential cash flows arising from a project. For instance, an international marketer might want to acquire an enterprise in Japan. Thus, he must determine the discounted value of all future cash flows (Heckel, 1999)…
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Since Bentley has somehow gained fame after operating with eleven stores in Southern Europe, Zeta's should look for 24-year AA bonds to determine the discount rate. Judging by the present status of Bentley in the Southern European market, the discount rate Zeta's should use to assess the value of Bentley for their equity holders should range from 5.0%-5.25%. At this low discount rate, they generally have a much shorter period concerning their liabilities. Furthermore, a discount rate of that range is competitive enough to acquire Bentley if Zeta's other competitors for Bentley acquisition uses a higher discount rate. Zeta's also have the advantage since they have operated for years and gained patronization from retail stores in London and Newcastle. Thus, using a lower discount rate to assess the Bentley's is a safe way for their excess cash. By doing so, Zeta's is being prudent enough. If they take the bond rate, Bentley equity holders would actually overview it down for prudence. Apparently, it is quite difficult to get a good AA measure for acquisition and bond yields. Markova (2001) states that if a company uses a discount rate of such range, the competitors tend to overlook the rate and thus t discourages them to continue bidding.
Terminal value is defined as the value of any item at the end of a particular time phase. ...
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