Question
Evershine is considering the acquisition of Flemax. Neither firm has debt. The current market value of Evershine is RM70 million, while Flemax is valued at
Evershine is considering the acquisition of Flemax. Neither firm has debt.
The current market value of Evershine is RM70 million, while Flemax is
valued at RM40 million. The forecasts of Evershine show that the acquisition
would increase its annual after tax cash flows by RM1 million indefinitely. In
addition, due to economies of scale, the production cost will be reduced by
RM2 million every year for the first ten years after the acquisition takes
place. The appropriate discount rate is 5 percent for the incremental cash
flow, and 8 percent for the production cost. Evershine is trying to decide
whether it should offer RM50 million in cash or 40 percent of its shares to
Flemax.
Required:
a.
Calculate the maximum price that Evershine should pay for Flemax.
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