1. DFC valuation requires a large number of assumptions, while multiples valuation requires only one assumption: that...
Question:
1. DFC valuation requires a large number of assumptions, while multiples valuation requires only one assumption: that the valuation ratio for a comparable firm be the same as the ratio for the target firm. Comment on this statement, using one of the multiples analysed in the course (cash flow, earnings or sale multiple) to support your answer.
2. Suppose that you hold a well diversified portfolio of stocks. Explain, in terms of variances and covariances, how one can measure the contribution of a single security to the portfolio variance.
3. Brealey, Myers and Allen analyse several motives for mergers and acquisitions. Please name and explain two doubtful motives and two sensible motives described by the authors.
4. Explain the implication of rebalancing the capital structure for the risk of tax shields.
5. Show the implication for the value of the company's shares as it increases leverage, according to Modigliani and Miller Proposition 2. Explain why that happens.