What is the maximum price acquirer should be willing to pay

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Reference no: EM13937556

A sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility of the desired size and to attain capacity operations would cost $430 million in present value terms. Alternatively, the company could acquire an existing firm or division with the desired capacity. One such opportunity is the division of another company. The book value of the division’s assets is $250 million and its earnings before interest and tax are presently $50 million. Publicly traded comparable companies are selling in a narrow range around 12 times current earnings (P/E =12). These companies have book value debt-to-asset ratios averaging 30 percent with an average interest rate of 15 percent. a. Using a tax rate of 40 percent, estimate the minimum price the owner of the division should consider for its sale. b. What is the maximum price the acquirer should be willing to pay? c. Does it appear that an acquisition is feasible? Why or why not?

Reference no: EM13937556

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