Question
Two ambitious Odette graduates, David and Hassen, are considering start their new business by purchasing Fantasy Car Technology, an automobile technology development company. Forecasted annual
Two ambitious Odette graduates, David and Hassen, are considering start their new business by
purchasing Fantasy Car Technology, an automobile technology development company.
Forecasted annual sales for the next year are $20 million, with operating costs equal to 60% of
sales, depreciation is 6% of sales, the tax rate is 35%, and required annual investment in
equipment is 7% of sales. Sales, costs, and investments are expected to grow 5% in perpetuity.
Based on their analysis of the IT industry, David and Hassen anticipate financing their company
with both debt and equity with a WACC of 7.78%. What is the maximum price David and Hassen
should be willing to pay for Fantasy Car Technology? Explain your answer.
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