An acquirer is looking to buy a pool servicing company. The acquirer is going to
ID: 2423573 • Letter: A
Question
An acquirer is looking to buy a pool servicing company. The acquirer is going to finance 60% of his acquisition through bank financing/loan with 7.5% coupon. The rest of the acquisition will be in a form of equity investment. The acquirer's investors required a 14.5% return on their investment in this purchase. The prevailing tax rate is 35% The acquirer was able to project the company's Free Cash Flow for the next 4 years. The growth rate after year 3 is projected to be in 4% in perpetuity"
Today's FCF: $3,000,000
FCF Yr1: $3,200,000
FCF Yr2: $3,600,000
FCF Yr3: $3,900,000
FCF Yr4: $4,095,000
What is the acquirer's cost of capital? What should he pay for the company on today's dollars? Show all the work and calculations.
Thank you very much guys!
Explanation / Answer
cost of capital= (wt of debt*cost of debt)+(wt of equity*cost of equity)
wt of debt=0.6 and wt of equity=.4
Cost of debt= (1-35%)*7.5%=4.88%
cost of equity=14.5%
Cost of capital=(.6*4.88%)+(.4*14.5%)=8.73%
Presnt value of company= PV of future cash flows
=[3,200,000/(1/0873)^1]+[3,600,000/(1/0873)^2]+[3,900,000/(1/0873)^3]
At year 4= 3900000*(1+g)/(k-g)
=3,900,000*(1.04)/(.0473)=85,750,530
=[3,200,000/(1/0873)^1]+[3,600,000/(1/0873)^2]+[3,900,000/(1/0873)^3]+[85,750,530/1.0873^4)
=$70,375,680
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