Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 2

A retail organization is considering acquiring a composite textile company. The retailer's due diligence team determined the value of the textile company to be $50 million. The financial experts forecasted net present value of future cash flows to be $60 million. Experts at the textile company determined their company's market value to be $55 million if purchased by another entity. However, the textile company could earn more than $70 million from the retail organization due to synergies.
Therefore, the textile company is motivated to make the negotiation successful. Which of the following approaches is most likely to result in a successful negotiation?

Answer options

• A. Develop a bargaining zone that lies between $50 million and $70 million and create sets of outcomes between $50 million and $70 million.
• B. Adopt an added-value negotiating strategy, develop a bargaining zone between $50 million and $70 million, and create sets of outcomes between $50 million and $70 million.
• C. Involve a mediator as a neutral party who can work with the textile company's management to determine a bargaining zone.
• D. Develop a bargaining zone that lies between $55 million and $60 million and create sets of outcomes between $55 million and $60 million.

Correct answer: D

Explanation

Option D is correct because it aligns with the market value estimates and future cash flow projections, focusing on a narrower range that reflects realistic expectations. Options A and B are less effective as they propose a broader range that may not consider the textile company's valuation accurately. Option C introduces a mediator, which may complicate negotiations rather than streamline them, especially when both parties can negotiate directly.