11. Eastern Steel Manufacturing is considering acquiring Chicago Iron Works. Eastern Steel

expects Chicago Iron Works free cash flow in the first year following the closing date for the

acquisition will be $125 million and that it will grow thereafter at the rate of 10% per year for

the next 5 years. Eastern Steels WACC for the acquisition is 12%, and its investment banker

estimates that the perpetuity growth rate for calculating the terminal value is 2% per year.

1. Specify Chicago Iron Works free cash flow stream for years 1 through 6.
2. Estimate the terminal value for the acquisition.
3. Calculate the value of Chicago Iron Works.
4. Eastern Steel believes it can acquire Chicago Iron Works for $1.6 billion. Should Eastern Steel proceed with the acquisition? Justify your answer.