Brown-Forman Distillers Corporation
The Earnings per share The level of value created for shareholders individually is not only dependent on the company’s results, but also the number of shares held. If the acquisition goes ahead, the number of Brown-Foreman shareholders stays the same and as such shares are not diluted.
Share Value After acquisition share value will increase if there is no increase in share amounts. The shares are not being diluted so shareholders will be getting more from each share held.
Asset/Equity Ratio There will enhance the asset/equity ratio from after a merger implying the assets have increased in relation to shareholders equity. These increased assets can be used to reinvestment in more profitable assets to generate more revenue for the company. Brown-Forman’s ratio pre-merger was below industry average.
Cash Flows Both Companies have positive cash flow. Southern Comfort Cash flows was provided from 1976 to 1977 and would predict for the following year if nothing drastic conditions occur. The cash flow for these companies both look strong and this will be good for Brown-Foreman in an acquisition.
Because of the value of company = Annual cash flow / WACC + Terminal Value/ (1+ WACC) (in perpetual), based on the formula. The annual cash flow and the cost of capital are the most sensitive to the valuation.