Chapter 7

Mergers and Acquisitions Cash Flow Valuation Basics

Abstract

This chapter begins with a brief review of rudimentary finance concepts, including measuring risk and return, the capital asset pricing model, the weighted average cost of capital, and the effects of operating and financial leverage on risk and return. How to construct free cash flow to equity (equity value) or to the firm (enterprise value) are discussed in detail as are the conditions in which it is appropriate to use each definition. Alternative valuation models, how to select the appropriate discount rate, valuing operating leases, the cash impact of deferred taxes, contingent liabilities, and the treatment of non-controlling interests and non-operating assets are explained. ...

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