Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The table below shows the projected free cash flows of an acquisition target. The discount rate to value the target is 9% discount rate. The

The table below shows the projected free cash flows of an acquisition target. The discount rate to value the target is 9% discount rate. The acquiring company expects the terminal period to begin at the end of 2022 with a perpetual growth rate of 4% from that point on.

YEAR 2018 (Year 0) 2019 (Year 1) 2020 (Year 2) 2021 (Year 3) 2022 (Year 4)
FREE CASH FLOW ($ thousands) -$120 $82 $92 $99 $101

The Present Value of $1 Table (Table 3) tells us:

Period (n) Present Value Factor at 9% Discount Rate
1 .917
2 .842
3 .772
4 .708

Terminal Value using perpetual growth equation:

FCFT +1 Kw g

Question: Based on the information above, what is the Maximum Acquisition Price (MAP) the acquirer would pay for this target as of 12/31/18? Hint: You need to use the present value table to discount 2019 through 2022 cash flows to the end of 2018 (Year 0) and add it to the terminal value at the end of 2022 discounted to the end of 2018.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Palgrave Handbook Of Technological Finance

Authors: Raghavendra Rau, Robert Wardrop, Luigi Zingales

1st Edition

3030651169, 978-3030651169

More Books

Students also viewed these Finance questions

Question

Describe loss aversion and myopic loss aversion.

Answered: 1 week ago

Question

sharing of non-material benefits such as time and affection;

Answered: 1 week ago