1. The most recent year-end financial data for company A is as follows:

Revenues=$112 million; Depreciation=$7 million

Operating income (EBIT) =$28 million

Earnings after taxes=$12 million Total assets=$172 million

Interest bearing debt=$54 million Common equity=$40 million

Shares outstanding=5.6 million Current price of the stock=$16.25

The company B is considering acquiring A. The investment bankers believe that the acquisition is a good one even if B were to pay a premium of 40%. Presently As cash flow is as follows:

EBIT (operating profit) after taxes $17

Depreciation 7

Total $24

Less: capital expenditures 8

Incremental working capital 3

Free cash flow $13

The company believes that with synergy it can grow the operating income by 20% per year for the next 3 years and then 12% per year for the next 3 years. At the same time, it plans to hold capital expenditures and working capital additions to a combined increase of only $2 million per year. At the end of 6 years, B is advised by investment bankers the cash flow will probably grow at 5% per year. The cost of capital computed by the IBs is 15%.

Certain comparable data of some recent M & A is as follows:

Equity value to book value 2.9x

Enterprise value to sales 1.4x

Equity value to earnings 15.3x

Enterprise value to EBITDA 7.8x

As B CFO, would you go ahead with the acquisition?