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- Finance & Accounting
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- Undergraduate
- Pages: 7 (1750 words)
- December 21, 2019

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Acquisition of Rustic plc by Triumph plcAcquisition is the purchase of shares or assets on another company so as to achieve managerial influence not necessarily on mutual agreement. This process requires the evaluation of the target enterprise so as to strike a deal (Hubbard, Nancy, 2001). There are various methods of evaluation that can be adopted as per the preference of the parties involved. In this case Triumph plc employees three of these methods as follows: Dividend valuation model without a growth rateP0 = the current price of the stock Div = the dividend paid at the end of year 1 Ke = required return on equity investmentsP1 = the price at the end of period oneP0 = Div1/ (1 + ke) + P1/ (1 + ke)Ke=. 20Div=2P1=3.68The combined company value will be as follows: P0=2/1+. 20 + 3.68/1+. 20=. 20/1.20 +3.68/1.20=. 1667+3.0667=4.73The current stock price for the combined company is £ 3.23 Dividend evaluation model with a growth rateVs=D0 (1+g)/rs-gWhere Vs is the current value of the stock D0 is dividend time 0g is the growth rate r is the stockholders required rate of return. Do =2R=. 20G=. 10In this case we will have Vs=. 2 (1+. 10)/. 20-. 10=. 22/. 10=£ 22.The share value added approach to estimation of cash flows for the first five yearsPo = D1/(1+i)¹ + D2/(1+i)² + D3/(1+i)³ + (Dn + Pn)/(1+i)ⁿDiv =. 20i=. 10Pn=3.68P0=. 20/1.10+. 2/1.12+. 2/1.13+. 2/1.14+ (. 2+3.68)/1.15=3.315=$3.32The value of stock of the combined company would be $ 3.32.Similarly shareholder value added approach could be worked out as follows: SAV=net operating profit after tax (NOPAT)-(capital x WACC)This requires the correct adjustment of the various figures from the statements of finance to be able to bring out the desired results.

For instance in this case we have a combined net operating profit after tax as triumph plc £ 11,040 + Rustic plc £5,400=£16440.Wacc=Rd (1-t) D/V +ReE/V. Re=Rf + β (Rm-Rf)Valuation of stock conceptBasically the basis of stock valuation is that in a market that has rational markets, the stock value today is the same as the present value of all cash flows that will accrue to the very investor in the stock (Hubbard, Nancy, 2001).

To put in other words is that the investor gets what he pays for in the sense of the present value. We can therefore use the principles of time value of money to get the value of the stock now base the future cash flows’ discounted value.

This is an intrinsic value of stock since it is found basing on all available information. Provided for indefinite time dividends are constant, the value of a share of stock is the same as the present value of the dividends per share per period, in perpetuity. Taking D1 to be a constant dividend per share of common stock expected for every period to come, P0 to be a price of a share of stock now, and r the stockholders required rate of return on common stock.

The present price of a share of common stock, P0, is: P0=D1/r. The required rate of return represents the compensation to an investor for the time value of money that is bound in the investment as well as uncertainty of getting future cash flows from the investment. The greater the risk the greater the return, for instance in this case the current dividend is £ 2 per share and the required rate of return is 20 percent, the value of the share stock is £ 20.

Thus, if one pays £ 20 per year and dividends stay constant at the £ 2 per share, the person will earn a 20 percent return on his investment every year.

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