Question
23. The table below shows the projected free cash flows of an acquisition target. The discount rate to value the target is 9% discount rate.
23. The table below shows the projected free cash flows of an acquisition target. The discount rate to value the target is 9% discount rate. The acquiring company expects the terminal period to begin at the end of 2024 with a perpetual growth rate of 3% from that point on.
| YEAR | 2020 (Year 0) upfront investment if acquired | 2021 (Year 1) | 2022 (Year 2) | 2023 (Year 3) | 2024 (Year 4) |
| FREE CASH FLOW ($ thousands) | -$120 | $82 | $89 | $92 | $99 |
The Present Value of $1 Table (Table 3) tells us:
| Period (n) | Present Value Factor at 9% Discount Rate |
| 1 | .917 |
| 2 | .842 |
| 3 | .772 |
| 4 | .708 |
Terminal Value using perpetual growth equation:
FCFT +1 Kw g
Question: Based on the information above, what is the Maximum Acquisition Price (MAP) the acquirer would pay for this target as of 12/31/20? Hint: You need to figure out the present value of the free cash flows from 2020 through 2024 as of the end of 2020 (Year 0) and add it to the terminal value at the end of 2024 discounted to the end of 2020.
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Intermediate Financial Management
Authors: Brigham, Daves
10th Edition
978-1439051764, 1111783659, 9780324594690, 1439051763, 9781111783655, 324594690, 978-1111021573
