Estimate the targets maximum acquisition price

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The following table shows the projected free cash flows of an acquisition target. The potential acquirer wants to estimate its maximum acquisition price at an 8 percent discount rate and a terminal value in year 5 based on the perpetual growth equation with a 4 percent perpetual growth rate.

Year

1

2

3

4

5

Free cash flow

-$800

-$400

$0

$200

$700

a. Estimate the target's maximum acquisition price.

b. Estimate the target's maximum acquisition price when the discount rate is 7 percent and the perpetual growth rate is 5 percent.

c. What is the percentage change in the maximum acquisition price when the discount rate is reduced one percentage point and the per- petual growth rate is increased one percentage point?

Reference no: EM13891796

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