Financial issues of divestitures, Financial Management

Assignment Help:

FINANCIAL ISSUES OF DIVESTITURES

Many corporations review the business portfolio to determine the operations that fit their core strategies. The firm's desire to achieve more focused business portfolio can result in operations becoming strategically redundant. The decision to sell or retain the business depends on the comparison of the after tax sales value of the business with the after tax proceeds from the sale of the business.

The following steps have to be considered to decide whether to sell or retain the business:

  • Calculating after Tax Cash Flows: To decide if the business is worth selling or not, the parent must first estimate after tax cash flows of the business. To do so, the company needs the inter-company sales and the cost of services.
  • Inter company sales represent operating unit revenue generated by selling products or services to another unit. The parent may value these operations using the transfer prices, which may be some market prices. If the transfer prices do not reflect the current market prices the intercompany revenue may depend on the transfer prices being higher or lower than actual market prices.
  • The cost of services reflects the legal, treasury, and audit services provided by the parent company. To reflect these factors, the cash flows of the business may be adjusted for services provided by the parent at more or less of what the business has to pay for them. Operating profits may be reduced by the amount of subsidies and increased by what the business would have to pay if it purchased comparable services offered outside the parent firm.
  • Estimating the Discount Rate: Once the after tax standalone cash flow over a discount rate is determined, it reflects the risk characteristics of the industry in which the business competes.
  • Estimating the After Tax Market Value of the Business: The discount rate is used to determine the market value of the projected after the tax cash flows of the business. The valuation is based on the cash flows that have been adjusted for inter company revenues and services provided to the operating unit by the parent firm.
  • Estimating the Value of the Business to the Parent: The after tax Equity Value (EV) of the business as part of the parent is estimated by subtracting the market value of the business liabilities from its market value (MV) as a standalone operation. EV = MV - L.

 


Related Discussions:- Financial issues of divestitures

NPV, Roxanne invested $560,000 in a new business 7 years ago. The business ...

Roxanne invested $560,000 in a new business 7 years ago. The business was expected to bring in $8,000 each month for the next 26 years (in excess of all costs). The annual cost of

Brief the term directors and managers, Directors and managers While dir...

Directors and managers While directors and managers are in concentrate attempting to promote and balance the interests of shareholders and other stakeholders it has been argued

Discount and premium, What is the  Discount and Premium? Describe please.

What is the  Discount and Premium? Describe please.

Risk-free interest rate, Price an Asian call option with on a stock with th...

Price an Asian call option with on a stock with the initial stock price $50 and volatility 30$. The strike price of the option is $52. The time to maturity of the option is 3 month

Cash management - managing excess cash, Cash management is about managing ...

Cash management is about managing excess cash also. The response of management must depend on whether the surplus is large and how long it is likely to exist. If the balance is

Essentials of rating service, Critical investment decisions may be ta...

Critical investment decisions may be taken based on the ratings offered by the credit rating agency. In order to ensure that the rating leads to good investment d

Discuss the advantages and disadvantages of gold standard, Discuss the adva...

Discuss the advantages and disadvantages of the gold standard. Answer:  The benefits of the gold standard include: (I) as the supply of gold is restricted, countries cannot compr

Define the meaning of objective - financial management, Define the meaning ...

Define the meaning of objective - financial management The term objectives offers a normative framework. That is the focus in financial literature is on what a firm must try to

Why do a split, Why do a Split? A 4 x 1 Split is an operation by which ...

Why do a Split? A 4 x 1 Split is an operation by which a shareholder now owns 4 shares for every share he/she had before. Logically, the stock market value of each of these new

Factors affecting cost of capital, Factors Affecting cost of capital are el...

Factors Affecting cost of capital are elements in the business environment that cause a company cost of capital to be high and low. Figure below illustrative the various primary fa

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd