8.20 Acquirer Company’s management believes that there is a 60% chance that Target Company’s free cash flow to the firm will grow at 20% per year during the next five years from this year’s level of $5 million.

Sustainable growth beyond the fifth year is estimated at 4% per year. However, they also believe that there is a 40% chance that cash flow will grow at half that annual rate during the next five years and then at a 4%

rate thereafter. The discount rate is estimated to be 15% during the high-growth period and 12% during the sustainable-growth period. What is the expected value of Target Company?

Answer: $94.93 million