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Hello All,
Can some please advice me on how to identify the type of valuation in merger/acquisition question. i know :
Valuation type 1 is no risk
Valuation type 2 is financial risk
Valuation type 3 is both business risk & financial risk.for example , In Dec 2013 , type 3 was used, so how can one find out?
Thanks
It really depends on the information given in the question.
Almost always the level of business risk will change – you will know whether or not this is the case depending on whether you are given information about the relative Betas (as you were in this question).
If it is type 2, then you would need to use an APV approach, in which case the question would probably say specifically to calculate the APV.
Whatever happens, you must state your assumptions. If your assumptions are sensible, then you will get credit for what you are doing (even if the examiners own answer makes different assumptions).
Incidentally, although I know what you mean (and I guess you do as well) – type 1 is not ‘no risk’. It is where there is no change in the financial or business risk.
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