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Coca-Cola Company, in its effort to establish a larger presence in the beverage market, is considering the acquisition of a small company that produces a drink called "Rain Kombucha." After acquired, the new business is expected to have a net after-tax cash flow of $8 million at the end of its first year of operation. After that its cashflows are expected to grow at a rate of 3% per year and forever. The investment required to buy the company is $60 million, which is paid today.
Problem a. If the return expected by Coca-Cola Company shareholders is 11% (the discount rate), should they undertake the project? Please show clearly how you arrived at your conclusion.
Problem b. The board of directors is doubtful about the rate of growth, which they consider be too optimistic. What is the minimum rate of growth required to invest in the project?
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