Your firm is involved in a bidding war for an acquisition. The firm to be acquired has annual cash flows of $719,000. The appropriate discount rate to use is 6.6%. Find the value of this acquisition, assuming the following scenarios: it is a no-growth firm it is a constant growth firm, with g=0.04 it is a variable growth firm, with gt=0.10 for three years, and gm=0.04. Enter your estimate for all three scenarios in the Valuation Forum. The winning bid for each scenario will be the highest bid offered, so long as the estimate does not exceed the true value of the firm. Can you please place the answers in the excel format?

Variable Growth Valuation Model

Given:

Most recent annual cash flow (CFo)

$

Stage 1 annual growth rate (gt)

Stage 2 annual growth rate (gm)

Duration of stage 1 growth (years)

Required return (k)

Steps in solution:

1)

Estimate future cash flows for the duration of the stage 1 growth period:

CF(0) = given

$

CF(1) = CF(0) * (1+gt)

$

CF(2) = CF(1) * (1+gt)

$

CF(3) = CF(2) * (1+gt)

$

2)

Use EXCEL's built-in NPV function to find the present value of these cash flows.

RATE

NPV (rate, CF1:CF3)

3)

Use the constant growth formula to estimate the value of the firm at the end of the rapid

growth period (V3)

where:

CF4 = CF3 (1+gm)

CF4 =

$

V3 = $ / (0.10-0.05)

Ve =

$

4)

Use EXCEL's built-in PV function to find the present value of the amount determined in step 3.

FV

$

RATE

0.10

NPER

3

PV

()

(You may ignore the negative sign for this answer.

Recall that EXCEL mandates that the amounts entered

for PV and FV must have opposite signs.)

5)

Add the amounts found in step 2 (the PV of the rapid growth cash flows ) and step 4 (the PV of the

normal growth cash flows).

PV of rapid growth cash flows

$

PV of normal growth cash flows

$

value of the firm

$