Question
In connection with plans to buy another company for NOK 3 billion, a company is preparing estimates for which cash flow the acquisition will contribute
In connection with plans to buy another company for NOK 3 billion, a company is preparing estimates for which cash flow the acquisition will contribute when synergies are taken into account. The assumption made is that the cash flow will be NOK 400 million before financial costs and tax the first year, then 2% more, ie NOK 408 million the following year, then another 2% more next year etc. so that the cash flow grows by 2% from year to year. The company counts as first cash flow comes one year after the acquisition, the other after two years, etc. and counts as one infinite number of periods. The company assumes that interest on debt related to the acquisition will amount to one constant share of the cash flow in all periods. More specifically, the company assumes that interest rates will constitute 30% of cash flow in all periods. The company uses the required return on total capital after tax, WACC, to calculate the net present value of the planned acquisition. WACC is estimated at 12%. The corporation tax rate is 25%. With the given assumptions, what is the net present value of the acquisition?
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