Mr. Mini Mee is the president of Evil Incorporated, a very small, but evil priva

Question

Mr. Mini Mee is the president of Evil Incorporated, a very small, but evil private company. He expects revenues in the forthcoming year of $20 million and costs (including taxes) of $15 million. During the subsequent five years (that is. years 2 through 6) Mr. Mini Mee forecasts that revenues and costs will grow by 25% a year, but anticipates that all profits will need to be plowed back into the business. Thereafter he forecasts that growth will drop to 5% a year and that he will need to plow back only 40% of profits. Mr. Mini Mee has recently been offered $75 million in cash for the company. Is this a fair offer if the opportunity cost of capital is 12%?

Explanation / Answer

Earning in Year 1 = 20-15= $ 5 Million

Earning in Year 6 = 5*(1+25%)^5 Milliom

Earning in Year 7 = 5*(1+25%)^5 *(1+5%) = 16.0217285 Million

Dividend in Year 7 = 16.0217285*(1-40%) = $ 9.613037 Million

Value at year 6 = 9.613037/(12%-5%)

Value at year 6 = $ 137.33 Million

Present value of Future Cash Flow = 137.33/1.12^6

Present value of Future Cash Flow = $ 69.58 Million

Offer Price = $ 75 Million

NPV = -75 + 69.58

NPV = -5.42 Million

No this is not a Fair Offer if the oppurtunity cost of capital is 12% since NPV would be Negative

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.