FREE online courses on Mergers & Acquisitions - Chapter 4 - Income Streams

 

One of the dilemmas within the merger and acquisition process is selection of income streams for discounting. Income streams include Earnings, Earnings Before Interest & Taxes (EBIT), Earnings Before Interest Taxes Depreciation & Amortization (EBITDA), Operating Cash Flow, Free Cash Flow, Economic Value Added (EVA), etc.

 

In financial management, we recognize that value occurs when there is a positive gap between return on invested capital less cost of capital. Additionally, we recognize that earnings can be judgmental, subject to accounting rules and distortions. Valuations need to be rooted in "hard numbers." Therefore, valuations tend to focus on cash flows, such as operating cash flows and free cash flows over a projected forecast period.