Question
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.
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