Question
You are an Acquisition Offer for an Investment Bank. You have been told that you must operate with a 6.0% WACC. Your Discount Rate is
You are an Acquisition Offer for an Investment Bank. You have been told that you must operate with a 6.0% WACC. Your Discount Rate is 6.8%. You have decided that you will make your recommendation based upon a five-year forecast.
The Company: Gross Income: Year 1: $824,261 Year 2: $840,746 Year 3: $857,561 Year 4: $874,712 Year 5: $892,206 Year 6: $910,050
You have estimated the cost of operations at the company to be 30%. Additionally, you believe that the ever-changing processing world requires constant upgrades to equipment. Therefore, you are projecting a new file server and workstations will need to be purchased in year four. The cost of the new system is $250.000. You believe a fair Growth Rate is 2%. The asking price is $9,158,455.
Questions: 1. What is the Residual Rate? Hint: What is the formula for Residual Rate? 2. What is the Capitalization Rate? Hint: What is the formula for Capitalization Rate? 3. What is the IRR of the acquisition? 4. What is the NPV of the acquisition? 5. Do you recommend this acquisition? Explain.
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