Reference no: EM133090884

Question - MedCom, a medical equipment producer is currently looking into acquiring Alto, which also produces medical equipment and is one of its closest competitors. Alto has a book value of debt of $100 million selling at 85% of par value, book equity of $90 million, 150 million shares selling at $5 per share, and $300 million in cash. MecCom will need to issue new debt and equity to finance the acquisition and MedCom estimates that the issuance costs of new debt and equity will be $10 million. Since MedCom will still maintain the same debt to equity ratio as before and since MedCom and Alto have the same beta, its weighted average cost of capital (WACC) will remain at 12% If the acquisition goes through this year, it will generate a free cash flow of $30 million next year, i.e., in its first year of operation. This cash flow is expected to grow at an annual rate of 15% for 5 years and then grow at a lower rate of 5% forever. What is the net present value of this acquisition project for MedCom?