question archive An acquiring firm is analyzing the possible acquisition of a target firm
An acquiring firm is analyzing the possible acquisition of a target firm
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An acquiring firm is analyzing the possible acquisition of a target firm. Both firms have no debt. The acquiring firm believes the acquisition of the target firm will increase its total after-tax annual cash flow by $3.4 million per year forever. The appropriate discount rate for the incremental cash flows is 9 percent. The current market value of the target firm is $85 million, and the current market value of the acquiring firm $150 million. If the acquiring firm pays 35 percent of its stock to the target firms shareholder. What is the net present value of the acquisition?
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-$14.72 million
Step-by-step explanation
The price paid for the acquisition=35%*current market value of acquiring firm
current market value of acquiring firm= $150 million
The price paid for the acquisition= $150 million*35%=$52.5 million
Present value of after-tax cash flows=total after-tax annual cash flow /discount rate
total after-tax annual cash flow=$3.4 million
discount rate=9%
Present value of after-tax cash flows=$3.4 million/9%=$37.78 million
NPV of the acquisition=-The price paid for the acquisition+ Present value of after-tax cash flows
NPV of the acquisition=-$52.5 million+$37.78 million=-$14.72 million
