Reference no: EM132014528

ABC Inc is looking to launch an acquisition of a target for $3 billion. The target is expected to generate cash flows for five years. Table 1 below shows the expected cash flows of the target along with the acquisition cost. Table 2 shows the financial data required to generate a discount factor for the cash flows. Calculate the discount rate (WACC) for the acquisition. Evaluate the deal using NPV, IRR, and Payback. Consider the following: Table 1. Table 2. Cost of acquisition: $3.0 billion Debt/Equity 0.40 Cash flow, 1 $550 million Target cost of debt 12.00% Cash flow, 2 $700 million Tax rate 30% Cash flow, 3 $825 million Treasury rate 4.0% Cash flow, 4 $1.2 billion Beta with SPX 1.14 Cash flow, 5 $1.5 billion Return on SPX 10.0% Use the cash flows associated with Table 1 (there is no salvage value after year 5) and calculate the firm’s cost of capital using the information in Table 2. Find the NPV and IRR on the proposed acquisition.