Firms A and B are competitors. Both have similar assets and business risks and are all-equity firms. Firm A has after-tax cash flow of $20,000 per year forever and firm B has after-tax cash flow of $150,000 per year forever. If the two firms merge, the perpetual after-tax cash flow will be $179,000. If the appropriate discount rate is 15% what is the MOST B will pay for A? a. $ 193,333 b. $9,000 c $20,000 d. $60,000 e. $133,333

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Firms A and B are competitors. Both have similar assets and business risks and are all-equity
firms. Firm A has after-tax cash flow of $20,000 per year forever and firm B has after-tax cash
flow of $150,000 per year forever. If the two firms merge, the perpetual after-tax cash flow will
be $179,000. If the appropriate discount rate is 15% what is the MOST B will pay for A? a. $
193,333 b. $9,000 c $20,000 d. $60,000 e. $133,333
Transcribed Image Text:Firms A and B are competitors. Both have similar assets and business risks and are all-equity firms. Firm A has after-tax cash flow of $20,000 per year forever and firm B has after-tax cash flow of $150,000 per year forever. If the two firms merge, the perpetual after-tax cash flow will be $179,000. If the appropriate discount rate is 15% what is the MOST B will pay for A? a. $ 193,333 b. $9,000 c $20,000 d. $60,000 e. $133,333
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