Question 1 As a leading producer, marketer and importer of wines and distilled spirits, Brown-Forman was the fifth-largest distiller in the United States. But the company spent huge amount of money advertising premium brands and significantly less on low profit brands. In the late 1970’s, the whiskey market declined and this presented Brown Foreman with growth challenges in a mature market. Brown-Foreman’s response to market pressures and competition was to aggressively move into other faster growing segments of the alcohol beverage market which required it to expand its product lines. The company also intended to increase its advertising spend to $86 million to aggressively promote its alcoholic product lines. The company also …show more content…

This means the project that has a good strategic fit to the product line and could be a strategic acquisition.

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.