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Homework answers / question archive / An acquiring firm is analyzmg the possible acquisition of a target furn Both firms have no debt
An acquiring firm is analyzmg the possible acquisition of a target furn Both firms have no debt. The acquiring firm believes the acquisition of the target firm will increase its total after-tax annual cash flows by $3.5 million per year forever. The appropriate discount rate for the incremental cash flows is 11 percent The current market value of the target firm is $75 million, and the current market value of the acquiring firm is $140 million If the acquiring fimi pays 35 percent of its stock to the target firm's shareholders, what is the cost of the acquisition? Enter your arsswer in the box shown below as milhons of dollars with 2 digits to the right of the decimal pomt
Computation of Value of Target Firm to Acquiring Firm:
Increase in total after-tax cash flow after acquisition =$3.5 million per year forever
Discount Rate for Incremental Cash Flow = 11%
Current Market Value of target firm =$75 million
Current market value of acquiring firm = $140 million
Present Value of Incremental Cash Flows = Cash Flow per Year Forever /Discount Rate
= 3.5/0.11
= 31.82 million
So, value of target firm to acquiring firm = 75+31.82 = $106.82
