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What is the max price a can pay for b without overpaying

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Reference no: EM133138818

Question - A wants to acquire B.

B exists for 3 years after which it is liquidated (liquidation value = 0)

B is expected to have sales of 180Mill in YR 1, 200M in YR 2, and 220M in YR 3. (COGS & SGAE together are expected to be 75% of sales. B's depreciation (not included COGS or SGAE) is projected to be 15Mill for each of the 3 YRS.

B's CAPEX are set to be equal to depreciation and no increase in NWC, and no increase in NOA (Net.Other.Assets.)

Corp tax rate = 25%.

A's WACC is 6% & B's WACC is 8%.

A estimates that it can reduce B's costs so that COGS&SGAE together in every year will be 70% of sales.

Assume it's appropriate to discount YR 1 expected free-cash-flow with a full annual discount rate.

Suppose Firm A finances the acq. of B with cash. What is the max price A can pay for B without overpaying.

Reference no: EM133138818

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