Determine whether the valuation as demanded by shares holders of STL is justified. If not, based on the information given, what should the price…

The shareholders of STL are demanding 90per share as part of the acquisition negotiations. Given that STL has 50 lakh shares outstanding, the value that is being asked for by their shareholders = 90 × 50 lakh shares = 45 crores. Neha has been asked to determine the valuation of STL based on prevailing current market expectations. She can arrive at valuations based on market price and discounted cash flows to determine a reasonable price range that can be offered. Valuation of STL based on Market Price: Market price of STL on November 6, 2024 = 80 per share. Number of shares outstanding = 50 lakh shares Therefore, market value of STL as on November 6, 2024 = 50 lakh shares × 80per share = 40 crores Valuation of STL based on discounted cash flow: Present value of cash flows = 15 crores × 0.909 +18 crores × 0.826 +20 crores × 0.751 = 13.64 crores +14.87 crores +15.02 crores = 43.53 crores. Value per share based on discounted cash flow = 43.53 crores / 50 lakh shares = 87.06 per share Therefore, the price demanded by STL's shareholders of 90per share is not justified. Neha can advise the management of 3CL that the negotiations can be done between the price range of prevailing market price 80per share and - 87.08 arrived based on future cash flows. These will reflect a valuation based on current market expectations. A price negotiated within this range would be reasonable for 3CL, the acquiring company, as well as for STL's shareholders. 3CL's offer to acquire the shares at 85 per share falls within this range.