Juicers Inc. is thinking of acquiring Fast Fruit Company. Juicers expects Fast F
ID: 2798711 • Letter: J
Question
Juicers Inc. is thinking of acquiring Fast Fruit Company. Juicers expects Fast Fruit's NOPAT to be $9 million the first year, with no net new investment in operating capital and no interest expense. For the second year, Fast Fruit is expected to have NOPAT of $25 million and interest expense of $5 million. Also, in the second year only, Fast Fruit will need $10 million of net new investment in operating capital. Fast Fruit's marginal tax rate is 40%. After the second year, the free cash flows and the tax shields from Fast Fruit to Juicers will both grow at a constant rate of 4%. Juicers has determined that Fast Fruit's cost of equity is 17.5%, and Fast Fruit currently has no debt outstanding. Assume that all cash flows occur at the end of the year, Juicers must pay $45 million to acquire Fast Fruit. What it the NPV of the proposed acquisition? Note that you must first calculate the value to Juicers of Fast Fruit's equity.
$45.0 million
$68.2 million
$86.5 million
$113.2 million
$133.0 million
The answer is option c) $86.5 millions, I don't need answer, I need step by step solution including formulas to work out this problem. The answers and solutions in this website from prior people are incorrect. Please work out this question only if you really now how to do it. thanks
$45.0 million
$68.2 million
$86.5 million
$113.2 million
$133.0 million
The answer is option c) $86.5 millions, I don't need answer, I need step by step solution including formulas to work out this problem. The answers and solutions in this website from prior people are incorrect. Please work out this question only if you really now how to do it. thanks
Explanation / Answer
The unlevered cost of equity is 17.5%. All cash flows are discounted at this rate.
Since there is no debt,
Cash flow in year 1 = $ 9 million
present value = 9//1.175 = 7.66, similarly present value of year 2 = 171/1.175^2 = 123.86
So present value of equity = 7.66 + 123.86 = 131.52 . The NPV is $131.52$45=$86.52 million
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.