Goliath Inc. is considering acquiring David Corp. Both firms are in the same industry and face the same business risk. The acquisition is expected to increase Goliath Inc.'s free cash flow by $10 million the first year, and this contribution is expected to grow at 5% per year from then on. Goliath Inc's cost of equity is 20%, its cost of debt is 6%, and it has a debt-to-equity ratio of 2, which it will maintain throughout the acquisition process. Assume the corporate tax rate is 25%. If the negotiated purchase price is $200 million, what is the NPV of this deal from Goliath Inc.'s perspective? Deal NPV $14.59 million Deal NPV $19.89 million Deal NPV negative $24.22 million Deal NPV $6.08 million
Goliath Inc. is considering acquiring David Corp. Both firms are in the same industry and face the same business risk. The acquisition is expected to increase Goliath Inc.'s free cash flow by $10 million the first year, and this contribution is expected to grow at 5% per year from then on. Goliath Inc's cost of equity is 20%, its cost of debt is 6%, and it has a debt-to-equity ratio of 2, which it will maintain throughout the acquisition process. Assume the corporate tax rate is 25%. If the negotiated purchase price is $200 million, what is the NPV of this deal from Goliath Inc.'s perspective? Deal NPV $14.59 million Deal NPV $19.89 million Deal NPV negative $24.22 million Deal NPV $6.08 million
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Goliath Inc. is considering acquiring David Corp.
Both firms are in the same industry and face the
same business risk. The acquisition is expected
to increase Goliath Inc.'s free cash flow by $10
million the first year, and this contribution is
expected to grow at 5% per year from then on.
Goliath Inc's cost of equity is 20%, its cost of
debt is 6%, and it has a debt-to-equity ratio of 2,
which it will maintain throughout the acquisition
process. Assume the corporate tax rate is 25%.
If the negotiated purchase price is $200 million,
what is the NPV of this deal from Goliath Inc.'s
perspective?
Deal NPV $14.59 million
Deal NPV
$19.89 million
Deal NPV negative $24.22 million
Deal NPV
$6.08 million
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