You are evaluating a business for acquisition. Your time horizon is 3 years. The business is an all-cash business (net income = annual free cash flow). Last year the business earned $2,000,000 after-tax. Earnings (free cash flows) are expected to grow at 4% per year. You believe the business can be sold at the end of 3 years and it will be valued at your company's P/E ratio (trailing 12 months), which is expected to be 15.

The current capital structure of your company is below and the company will not be required to raise any additional capital for the acquisition.

Market value of debt = $2,000,000 Yield-to-maturity of debt = 5%

Market value of preferred stock = $1,000,000 Market yield on preferred = 6%

Market value of common equity = $15,000,000

Additional data:

Company tax rate = 21%

Company beta = 1.4

Current risk free rate = 2%

Expected total return from market = 10%

Company management is in negotiations with the current owners of the business. The current asking price for the business is $25 million.

Is the business worth the asking price? Why or why not?

(Show all work in determining your answer)