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Shiv Roy is convinced that it is time for Waystar Royco to diversify away from traditional media and she is pushing for the acquisition of
Shiv Roy is convinced that it is time for Waystar Royco to diversify away from traditional media and she is pushing for the acquisition of (unlevered) internet company Gojo. Shiv forecasts that if the acquisition of Goo occurred today the combined company would subsequently generate unlevered free cash flows of $600.M in 2024, $850M in 2025, and then S1, 000 M per year forever. She also forecasts that, if Waystar Royco fails to acquire Gojo, Gojo will soon be acquired by Pierce Global Media, causing Waystar Royco's future unlevered free cash flow to remain constant at $750 M in 2024 and 2025 before declining at a rate of -10% per year forever. For both entities, the relevant tax rate is 20% and the unlevered cost of capital is 11%. The acquisition would be financed with new bonds whose total face value of $900M must be repaid in 4 years and whose annual cost of debt is 6% (with interest expenses being fully tax deductible within the year they are realized) as well as with equity. Compute the maximal amount that Waystar Royco should be willing to pay to acquire GoJo today
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