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Acquisition Decisions at Kellogg's

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Kellogg Co. agreed to acquire Keebler Foods Co. for $3.86 billion, or $42 per share.

How would discounted cash flow analysis be used in analyzing such a major acquisition decision?

What were Kellogg's objectives in the acquisition?

What kinds of qualitative issues could enter into the decision?

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How would discounted cash flow analysis be used in analyzing such a major acquisition decision

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How would discounted cash flow analysis be used in analyzing such a major acquisition decision?

DCF analysis separates the company's value drivers over a multi-period forecast, forcing the analyst to consider all facets of the company's operations. Projected after-tax unlevered free cash flows and terminal value are discounted by the weighted average cost of capital (WACC) to arrive at Enterprise Value. Additionally, projected after-tax levered free cash flows can be discounted by the cost of equity to value the equity directly. DCF analysis is widely used for its flexibility in handling different patterns of cash inflows and outflows, and its focus on future operations.

Often times in industry, DCF analysis is done to provide a sanity check for a given valuation. The price per share derived ...

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