1. You are a partner of Private Equity Firm, Lion LLC (Acquiring firm) and you h

Question

1.     You are a partner of Private Equity Firm, Lion LLC (Acquiring firm) and you have the following information for the acquisition of the firm, ABC Corp (target firm), which is currently your project. The target firm is a private firm.

Suggested bidding price for the target = $147 million.

Comparable firms of the target firm: unlevered cost of capital = 6.54%.

Five year estimation of free cash flow to the firm (FCFF) and interest tax shields

o   FCFF: 13 million (t=1), 7.4 million (t=2), -5.8 million (t=3), 1.4 million (t=4), and 10.3 million (t=5)

o   Pre-determined Interest tax shields: $2.3 million at t=1, $2.3 million at t=2, $2.3 million at t=3, $2.7 million at t=4, $2.8 million at t=5 (assuming that cost of debt is 7% for the target firm and this rate is for the PV of tax shield)

Explanation / Answer

Adjusted present value of the project = Unlevered NPV of free cash flows for 5 years + NPV of assumed terminal (or continuation) value + NPV of pre-determined interest tax shield for 5 years

To calculate the NPV of FCFF (from NPV calculator):

Taking into account the suggested bidding price of $147 million for the target firm, the estimation of FCFF

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