14.12 Acquiring Company is considering buying Target Company. Target Company is a small biotechnology firm that develops products licensed to the major pharmaceutical firms. Development costs are expected to generate negative cash flows during the first 2 years of the forecast period of $(10) million and $(5) million, respectively. Licensing fees are expected to generate positive cash flows during years 3–5 of the forecast period of $5 million, $10 million, and $15 million, respectively. Because of the emergence of competitive products, cash flow is expected to grow at a modest 5% annually after the fifth year. The discount rate for the first 5 years is estimated to be 20% and then drop to the industry average rate of 10% beyond the fifth year.

Also, the present value of the estimated net synergy created by combining Acquiring and Target companies is $30 million. Calculate the minimum and maximum purchase prices for Target Company. Show your work.

Answer: Minimum price: $128.5 million; Maximum price: $158.5 million.