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

Mathematical property of median, Mathematical Property The sum of the d...

Mathematical Property The sum of the deviations of the items from median, ignoring signs, is the least. For example, the median of 6, 10, 14, 18 and 22 is 14. The deviations fr

Sinking fund provisions, Sinking fund provisions is a pool of funds s...

Sinking fund provisions is a pool of funds set aside to repay the debt. Under this, certain amount of money is kept aside every year form profit. It is then used

State the impact on profitability of the company, State the impact on profi...

State the impact on profitability of the company Everything you do has an impact on profitability of the company(including drinking ten cups of coffee in a day!). So if you wan

Preliminary screening, I am facing some problems in my assignment on the to...

I am facing some problems in my assignment on the topic Preliminary Screening. Can anybody suggest me the proper explanation for it?

What do you mean by marketability, Q. What do you mean by Marketability? ...

Q. What do you mean by Marketability? Marketability: The firm must be able to sell its holdings and realize cash as and when required. The securities must be readily marketable

Takeover risk, If the issuer company is taken over, then the bondhold...

If the issuer company is taken over, then the bondholders are likely to suffer. It is due to lowering of the stock prices in the market as a post takeover effect.

Government bonds, Government securities are the most important and un...

Government securities are the most important and unique financial instruments in the financial markets of any economy. Government of India Securities (GOI Sec) in

Define factor fx call or put option model price is function, List the argum...

List the arguments (variables) of which a FX call or put option model price is a function.  How does the call and put premium change with respect to a change in the arguments?

What is exit strategy, Exit strategy Venture capitalists and other fina...

Exit strategy Venture capitalists and other financiers will negotiate an exit strategy at the point of advancing the money. The exit strategy will involve them realising their

Maturity risk premium is zero, The actual risk-free rate is 4%. Inflation i...

The actual risk-free rate is 4%. Inflation is likely to be 3% this year and 4% during the next 2 years. We suppose that the maturity risk premium is zero. What is the yield on 2

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