Question 2 - Part b

In this lesson

1. 0:00 Part B: Calculating maximum acquisition premium
2. 0:39 Calculated intangible value method explained
3. 1:11 Gathering pre-tax earnings and capital employed data
4. 2:18 Working out average capital employed figures
5. 4:09 Understanding company value spread calculation
6. 5:06 Discounting intangible value to perpetuity
7. 6:16 Price earnings method with synergy approach
8. 7:15 Valuing Strand Co using PE ratio
9. 8:05 Calculating Have Co current market value
10. 9:29 Combined company valuation and premium calculation
11. 11:41 Summary: Two acquisition premium methods

About this lesson

This is a critical skill for Strategic Business Leader and Advanced Financial Management papers, where acquisition analysis forms a core part of exam questions. The calculated intangible value method works by identifying the "economic profit" generated by a company's intangible assets. You'll calculate average pre-tax earnings and average capital employed, then subtract the earnings you'd expect from tangible assets alone (using the industry return on capital employed). This surplus is converted to post-tax terms using the corporation tax rate, then discounted into perpetuity to establish the premium. This approach isolates the value created by goodwill, brand, and other intangible factors. The price-earnings method values each company separately before combining them. You'll apply each company's PE ratio to its profit after tax, then calculate the combined entity's value using a blended PE ratio that reflects synergies. The acquisition premium is the difference between the combined company value and the sum of the individual valuations. This method is often more intuitive and familiar, but both approaches are examinable and worth practising. The key to success here is precision with your figures—watch for share nominal values, tax adjustments, and whether you're working pre-tax or post-tax. Both methods should yield defensible premiums; examiners credit solid methodology even if your final numbers differ slightly from the model solution.

Duration: 14m