Question
LinB Corp. is considering acquiring Hugo Inspection Inc. a relatively small local company. LinB believes it can grow Hugo Inspection' revenue by 20 percent per
LinB Corp. is considering acquiring Hugo Inspection Inc. a relatively small local company. LinB believes it can grow Hugo Inspection' revenue by 20 percent per year for the first four years after it acquires the firm. In the year just ended, Hugo's revenue was 2 million. Operating expenses (COGS plus SG&A) are projected to be equal to 50% of the sales. Depreciation expenses is forecasted to be $50,000, $60,000, $65,000, and $65,000, respectively for the next 4 years. Retentions to sustain the business (Capital Expenditures and net operating working capital) are expected to equal to $200,000 per year for the next 4 years. After 4 years, net cash flows are expected to grow at a constant rate of 6 percent. LinB's tax rate is 30%. Assuming that the appropriate cost of capital is 15 percent, what is the maximum LinB should pay for Hugo Inspection?
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