1. Why is the DCF model better in M&A analysis (page 586)? Please pay special attention to Tables 1, 2, & 3.

2. What is Free Cash Flow (FCF) used in the model and how do we arrive at FCF?

3. Are there other models that an analyst may use to determine value?

4. What are they and when would one use these in place of a DCF model?

Methods of Valution for Mergers and Acquisitions This note addresses the methods used to value companies in a merger and acquis tions (M&A) setting. It provides a detailed description of the discounted-cash-flow (DCF) approach and reviews other methods of valuation, such as market multiples of peer firms, book value, liquidation value, replacement cost, market value, and com parable transaction multiples. Discounted-Cash-Flow Method Overview The DCF approach in an M&A setting attempts to determine the enterprise value or value of the company, by computing the present value of cash flows over the life of the company. Because a corporation is assumed to have infinite life, the analysis is broken into two parts: a forecast period and a terminal value. In the forecast period, explicit forecasts of free cash flow that incorporate the economic costs and benefits of the transaction must be developed. Ideally, the forecast period should comprise the interval over which the firm is in a transitional state, as when enjoying a temporary competitive advantage (i.e., the circumstances where expected returns exceed required returns). In most circumstances, a forecast period of five or ten years is used. The terminal value of the company, derived from free cash flows occurring after the forecast period, is estimated in the last year of the forecast period and capitalizes