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 11 percent. The current market value of the target firm is $95 million, and the current market value of the acquiring firm is $160 million. if the acquiring firm pays $110 million in cash to the target firms shareholders. What is the net present value of the acquisition?
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Step 1
Annual cash flow =$3.4 million
Discount rate =11%
Payment done=$110 million
Step 2
Annual cash flow =3.4 million
Discount rate =11%
Present value =Cash flow/Discount rate
Present value of cash flow=3.4/(0.11)=30.91
Net present value =Present value of annual cash flow -Cost of acquisition
Net present value =30.91-100=-79.09
Net present value =-$79.09millon
