INTRODUCTION: Review the M&A Case of Microsoft’s decision to pursue a joint-venture with Yahoo in the example spreadsheet. Using your financial services company EBIT acquisition scenario, develop a valuation of Real Options including an option to abandon for a 3-year period. A Real Options method is important to have available because it isolates financial risk in the decision process.
Frequently, options are viewed from a strategic perspective in relation to implementation tasks. However, for most financial managers, it is essential to develop appropriate financial risk modeling and not rely on assessment of task strategies and techniques alone when considering complex M&A decisions.
Real Options analysis requires development of probability distribution for a base case and an additional worst case scenario which allows abandonment of the activity to stem further negative cash flow or earnings losses.
SPECIFICS OF THE ASSIGNMENT: In this assignment, you will write a 1 1/2-2 page narrative analysis of your selected financial service company’s real options with option to abandon valuation. Base your analysis on descriptive statistical analysis of 3-5 years of historical EBIT/Cash flow data and forecast. No year over year, point to point recitations please.
Calculate and use descriptive statistics (e.g., mean, median, standard deviation, geometric mean, rolling average, min, max, etc.) see example Excel worksheet [Content] or other sources. Use descriptive statistics in your narrative analysis for best grade (e.g., discuss mean relative to median, standard deviation, reversion to the mean, scenarios, rolling average trend, etc.).
Typically, the analyst finds the mean or median ratio and standard deviation valuation. Multiple scenarios of estimated value are presented to demonstrate a probability distribution range estimate of value.
What might be a reasonable HighLowMostLikely distribution of options and valuation? Be aware understanding drivers for an explicit range estimate within 1 standard deviation is extremely helpful to the reader while a single deterministically calculated point estimate usually becomes an example of a wrong answer!... with little context for revising to a better estimate. For best grade, choose a roughly right approach rather than exposure to precisely wrong.
This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.Real Options: Option to Abandon
The base case is for the Acquirer to buy 100% of the Target’s shares in the price range of $1.55 billion to $1.7 billion determined in the enterprise value analysis. Should the target accept the bid of $1.6 billion as proposed by the Acquirer, the combined company has the option to expand through additional investment in new products and services once the integration of the two companies is completed. The other possibility is...