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Hi tutor,
Termination of contract:1.I don’t understand how the forecast future cashflows of zebra co will be critical in determining the value of the zebra co and the price offered by cheetah co?
2. The impact of the new supplier cannot be determined now.How does cheetha co use this uncertainty as a tool for bargaining with the owners of zebra co over the final agreed price?
Thank you! 🙂
Hello
1. It is no different to FM investment decisions/business valuations – PV of future cash flows is going to have some relevance to the negotiations on price.
2. Zebra’s future cash flows will derive from its future trading. Its cash flow forecasts presumably factor in the future sales it expects from it customer base – but the info in 1 tells you that not only has part of that customer base moved to another supplier, but that other supplier is a new entrant and cheaper competitor to Zebra. So perhaps other customers will not renew when their purchase agreements are at an end. Or maybe Zebra will have to reduce its prices to remain competitive. The information would certainty reduce the price that Cheetah might otherwise pay for Zebra.
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