Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Company X is planning to acquire the company Y. However, John, the CFO of X company, is very uncertain about the future of this acquisition

Company X is planning to acquire the company Y. However, John, the CFO of X company, is very uncertain about the future of this acquisition under current economy. If economy is good, Y will generate free cash flows of $50 million per year for 3 years (starting next year). If economy is bad, Y will only have free cash flows of $10 million per year for 2 years (starting next year). There is an equal chance that economy will be good or bad (probability = 50%). X is offering $80 million to acquire Y. Do you think $80 million a fair price? Why or why not? Use 10% discount rate in your calculation.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions

Question

Is it fun to misplace currency on an investment ?

Answered: 1 week ago