Submitted by: Submitted by pickenstd1
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Words: 1263
Pages: 6
Category: Business and Industry
Date Submitted: 11/23/2011 10:46 PM
TSE International had been negotiating terms to acquire Yeats Valves and Controls Inc. In order for the acquisition to take place, TSE must perform an accurate valuation of the stock of TSE and YVC. Once the value of the stock is determined, a proper exchange ratio can be determined and an offer can be presented. Before we can utilize a valuation model we must first determine the cost of equity and the growth rate for each company.
Cost of equity was evaluated using the CAPM method measuring expected rate of return over a particular holding period. The US Treasury Yield of 30 year bonds and arithmetical average historical risk premium were used assuming that the investor risk aversion had actually been constant during the period. With this information we obtained a required rate of return of 12.1% for TSE and 16.78% for YVC. Growth rate was determined to be 5.83% for TSE and 13.57% for YVC.
On December 1999, the market value of the common equity of YVC was $41.04 million. With 1,440,000 common shares outstanding, this resulted in a price per share of $28.50. After word began to circulate about a possible acquisition, stock price rose to $39.75 by May 1, 2000. This resulted in the market value of the common equity of YVC of $57.2 million. On December 1999, the market value of the common equity of TSE International was approximately $1.05 billion. Price per share equated to $16.78 with 62,694,361 common shares outstanding. By May 1, 2000, stock price rose to $21.98, making the market value of the common equity $1.38 billion.
The market value method is widely recognized, and has been adopted as the industry standard for valuing companies faced with acquisitions. This method provides a fundamental basis for company valuation as long as a number of comparable companies can be identified. The market value measurement is more relevant to investors and creditors because it reflects the current market price of a financial instrument. Market value...