Business Valuation: Modelling Forecasting Hurdle Rate

Abstract

Consolidation, Combination and Diversification (CCD's) in the emerging globalized market leads to competition and escalating the monopoly power. Given the increasing liberalization of rules, regulations and law, a number of firms are going beyond national borders and making deals triumphant. We suggest an innovative firm valuation model for M&A in the area of Corporate Finance that is NRR Approach 1.0. The methodology is divided into five phases, modeling forecasting hurdle rate, finding sales growth rate, computation of free cash flows & estimation of future free cash flows and finally determination of firm value under NRR approach. The findings suggest that NRR approach considers various imperative factors while valuing target firms for the benefit of shareholders. The value of study could be credited by NRR Approach 1.0. and this is the first of its kind model considers political, transfer and commercial risk factors while estimating hurdle rate. Hence, approach is the first version of development thought and has limited scope to validate in other industries. We ISSN 1946-052X 2011 www.macrothink.org/ajfa 87 believe that NRR model shall be of great help to M&A advisory firms and investment bankers while negotiating deal value in acquisition process. This would be help in exploring new dimensions of judgment and approach for academia as well as for the benefit of target firm shareholders in corporate arena. Asian Journal of Finance & Accounting

Reengineering, crafting and comparing business valuation models – the advisory exemplar

“…There are various methods suggested by Western authors including: Tobin's q model (Tobin, 1969); diverse valuation models and results (Damodaran, 1996(Damodaran, , 2002Fernandez, 2002Fernandez, , 2003Fernandez, , 2007, assessment of valuation models (Levin and Olsson, 2000;Plenborg, 2002;Bailey et al, 2008); value relevance of accounting information (EI Shamy and Kayed, 2005;Misund et al, 2008), and estimating free cash flows (Velez-Pareja and Tham, 2010). Exclusive studies are: valuation of shares through simulation (Roy, 1986); valuation model for international acquisitions (Madura et al, 1991), valuation of hotels, property, and real estate (Hattersley, 1990;Graaskamp, 1992;Roubi, 2004), common errors in valuation (Fernandez and Bilan, 2007), psychology driven pricing in mergers (Baker et al, 2009), valuation of young companies (Zwilling, 2009), and comparison of NAV and NRR approach 1.0 (Nangia et al, 2011). Relevant studies include: relationship between corporate governance, board size, and valuation (Yermack, 1996;Bai et al, 2004); industrial diversification and firm value (Wilcox et al, 2001;Lin and Su, 2008); effect of cultural differences on firm value (Antia et al, 2007); impact of value drivers on firm value (Kazlauskienė and Christauskas, 2008), and the economic impact of mergers on firm value (Ma et al, 2011).…”

“…They also studied the growing number of outside-US acquisitions of US firms and cause-effect of divestitures and leveraged buyouts. In a recent study, Nangia et al (2011) developed the first version of the NRR approach 1.0 through considering various imperative factors that lead to define firm value for benefiting target entity shareholders. They validated the NRR 1.0 model in two select firms and results have been compared with NAV.…”

“…The present study designs an NRR-APB approach through a mix of macroeconomic and accounting factors to determine the correct bargaining value. Further, this model has been developed on the principles of NRR approach 1.0 (Nangia et al, 2011) and the theme of psychology-driven pricing in M&A (Baker et al, 2009). Hence, Nangia et al's method is the first version and does not consider the value drivers of market capitalization.…”

“…Both reengineering and new models have been developed on the foundations established and guidelines recommended by Tobin (1969), Hattersley (1990), Damodaran (1996), Plenborg (2002), Roubi (2004), Fernandez (2002Fernandez ( , 2007, Fernandez and Bilan (2007) and Bailey et al (2008). Specifically, the NRR-APB model has been motivated by and built on the principles of Madura et al (1991) and Nangia et al (2011).…”