1. Imagine you are considering acquiring a company. You have received their fina
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Question
1. Imagine you are considering acquiring a company. You have received their financial statements, and have learned that they have annual cash flows of:Year 1: $10 Million
Year 2: $8 Million
Year 3: $14 Million
Year 4: $17Million
Additionally, assume that in year 4 you will have a terminal cash flow of $250 Million, should you decide to sell the company at that time. If your discount rate is 15%.
What is the NPV of the project?
2. Using the NPV from the previous example, answer the following question: if you need to purchase 20 Million shares to acquire the firm, what should your offering price be?
3. In a merger, we often say that synergies arise, where the value of the whole exceeds the sum of the parts. What could these synergies arise from? Be specific, using supporting examples.
Explanation / Answer
the Net Present value (NPV) of the project is Present value is ($10 + $8 + $14 + $17) = $49 million NET present value is $49/(1.154) = $28.02 million
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