Question
Suppose that your firm is considering divesting (i.e., selling) one of its product lines. You have been approached by a prospective buyer that is willing
Suppose that your firm is considering divesting (i.e., selling) one of its product lines. You have been approached by a prospective buyer that is willing to pay as much as 25 million for it. The product line is expected to generate a cash flow of 2 million during the next year of operations. Thereafter, annual cash flows are expected to grow at a rate of 3% in perpetuity. The risk of the product line is comparable to that of the overall stock market, whose annual rate of return is estimated to be 9%. On the other hand, the short-term government bond (a risk-free investment) currently yields a 2% annual rate of return. Should you accept the offer of the prospective buyer?
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