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Calculating a fair rate of return

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Question - The CFO of a listed mining company, is considering making an offer for a 25% shareholding in the company. He did a valuation of the shares using the P/E multiple method and took various risk factors into account to establish a realistic fair rate of return for the company.

Below are the risk factors and the percentage adjustments made to get to the fair rate of return:

1) A 2% risk factor due to a decline in the economy and specifically related to the mining industry;

2) A 1% risk factor due to the company being a listed;

3) A 1% risk factor due to profits declining over the past 12 months;

4) A 2% risk factor due to management having a proven track record for making the right business decisions;

5) A 2% risk factor due to a weaker rand and the company having to pay for imported equipment in its plant.

A similar fair rate of return for a mining company is estimated at 15% before tax.

How would go about calculating a fair rate of return using the concepts and principles of mergers and acquisitions.

Reference no: EM132961859

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