Reference no: EM133178312

Question - You are part of an M&A-team that will decide whether to buy the company VX Inc. today, or in 2 years, or perhaps decide not to buy at all. For the consideration to buy the company, you only consider today or in 2 years (if you do not buy the company in 2 years, we assume you do not consider it anymore). The market value of VX's main competitor has a market value of $300 million today, and this competitor has various similarities to VX. The disadvantage of waiting to buy VX Inc. is that the company gets the opportunity to reduce their costs in the meantime, and thus you will have to pay more for the company in 2 years. However, there is the possibility that the competition will increase the next two years, which means that the price of VX Inc. may decrease compared to the current market value. Volatility of the market value is 35 %. Risk-free interest rate is 5 %. The cost of capital is 10 %.The M&A team chooses to use the Black-Scholes model to assess whether, and when, you should buy VX Inc. If you buy the company in 2 years, you estimate that the purchase price will be $320 million at that time. If you instead buy the company today, the team will negotiate a price at $290 million. Further, if you wait 2 years before buying the company, you will lose $20 million in profit. Answer the following questions and show all estimations:

a) Should you buy the company, and if so, when should you buy?

b) Does the conclusion in exercise a become different if the volatility is 45%?