Cowboy Curtiss' Cowboy Hat Company recently completed a merger.When valuing the combined ﬁrm after the merger, which of the following is an example of the type of common mistake that can
Occur?

Question

Quizplus · Accepted Answer

The use of Curtiss' discount rate for valuing the cash flows of the entire company can be a common mistake. This is because the combined firm may have a different risk profile and thus a different cost of capital than Curtiss' company alone. The discount rate should reflect the risk of the cash flows being discounted, which may change after a merger.

Cowboy Curtiss' Cowboy Hat Company Recently Completed a Merger