Sample Term Paper
The acquisition of Qantas Airlines by British Airways will be an all cash deal where shareholders of Qantas Airlines will be paid cash for each share purchased by the company. The valuation and pricing of shares will be performed through the discounted cash flow technique. The discounted cash flow technique is one of the most popular techniques to evaluate mergers and acquisitions and involves the discounting of expected cash flows the target company will deliver to the acquirer after acquisition.
The expected cash flows are estimated by forecasting the financial statements of the target company for 3 to 10 years depending on volatility of the target company (Rock, Rock and Sikora). The actual and forecasted financial statements of the company have been included as Appendix 1 in this article. The forecasted income statement and balance sheet have been prepared with common size financial statements concept and a growth rate of 3 percent has been applied to the income statements of the company and a growth rate of -2.5 has been applied to the balance sheets. These growth rates have been estimated on the historical year-to-year growth rates of both statements. The cash flow statement of the company has been forecasted using the Compound Annual Growth Rate – CAGR concept where the growth rate of each component of the cash flow statement has been estimated individually. The three year forecasted cash flows of the company have been discounted with a factor of 10.5 percent which is the weighted average cost of capital of the company as indicated in its annual report (Qantas).
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