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Assalam walaikum… May Peace be upon you… I did some examples from BPP text on valuation of different types of acquisition, but I am still confused…In exam how would we know if its type 1, type 2 or type3 acquisition? … Thankyou
A type 1 is where the business risk (beta) and the gearing stay the same. In this case we can simply discount at the current WACC.
Type 2 is where the business risk stays the same, but the gearing changes. In this case we can discount the project at the return given by the ungeared (asset) beta, and then deal separately with the extra gearing (an APV approach).
Type three is where both risks change, and therefore we have to get the beta for the project by calculating the asset beta of a similar company and then continuing as per a type 2.
However…….don’t worry too much about learning the numbers of the types. The examiner does not seem to be interested in calling it a Type 1 or a Type 2 or a Type 3. The question usually gives information relating the business and gearing risks and then you follow the ‘rules’ without needing to describe which ‘type’ it is.
Hope that helps 🙂
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