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Four Methods/Models for Evaluating Fair/Market Value Price

In the financial management component of M&A activity, valuing a company is extremely important given how many deals fail and how many Acquirers overpay. Pricing the transaction, (i.e. calculating the value of the target), can be performed using a variety of methods. Of all the methods/models (26 in total) discussed in class, select four, and in your opinion, describe how they can provide you with a "reasonable" purchase price/Fair Market Value. Be Specific! Discuss the limitations that may exist for each!

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Book Value
Book value is an appropriate method for firms that have no intangible assets, commodity-type assets valued at market and stable operations. However, the method should only be used whenever appropriately. The method depends on the accounting practices, which may be different across companies. Intangible assets such as: brand names, patents, technical know and managerial competence are all ignored. Inflation is ignored in the price appreciation due. The method is backward looking because it ignores the positive or negative operating prospect of company and is not a good proxy for market value.

Liquidation method
The liquidation method is appropriate for firms that are in financial distress or firms with cloudy operating prospects. The skills required to operate such a business is similar to a business mortician instead of an operating manager. In the liquidation method, the sale of assets at a point in time. It is ...

Solution Summary

The four methods/models for evaluating fair/market value price is determined. The limitations that may exist for each is examined.