What does the valuation in a precedent transaction analysis rely on?

• A. Future cash flows
• B. Historic stock prices
• C. Recent transaction values of similar companies
• D. Current market capitalization

Answer: (C)

In a precedent transaction analysis, the valuation relies on recent transaction values of similar companies. This methodology involves analyzing past transactions where comparable companies were acquired to derive insights into the valuation multiples paid. By examining these historical transaction values, analysts can assess how the market has valued similar companies in the past, which can provide a benchmark for valuing the target company in the transaction at hand.

This approach is particularly useful because it reflects actual prices paid in the market, offering a real-world basis for valuation rather than theoretical models. It captures a range of factors such as market conditions, investor sentiment, and specific circumstances surrounding each transaction, which are critical for determining a fair value for the current target company.

All other options, while relevant to corporate finance in general, do not specifically align with the premise of precedent transaction analysis. Future cash flows are more relevant in discounted cash flow (DCF) analysis, historic stock prices reflect market performance over time but do not indicate acquisition values directly, and current market capitalization represents a public company's market value but does not capture the transactional dynamics of acquisitions.