10) Your company is considering purchasing another company. You expect that comp
ID: 1096775 • Letter: 1
Question
10)
Your company is considering purchasing another company. You expect
that company to have an after tax cash flow $90 million per year for the
next 10 years. You have alternative investments available to you that earn
10% returns. What is the maximum amount you should you pay for this
company ?
11)
For the same company in problem 10. You are concerned the cash flow
of the company will be reduced below your expectations due to cost
increases by $10 million per year for the next 10 years and by another $10
million per year in years 5 and 6. What is the new maximum amount you
would pay for the company ?
12 )
The balance sheet of a firm is (in millions of $):
Cash 85 Short term debt 135
A/R 350 A/P 230
Inventories 150 Long term debt 175
Net Fixed Assets 565 Owner
Explanation / Answer
10) Maximum amount = 90*(1-1/1.1^10)/10%= $553.01
11
1
2
3
4
5
6
7
8
9
10
Cash flow
90
80
70
60
40
30
30
20
10
0
Maximum amount
$312.24
12 a)Working capital = Current asset-current liabilities = 85+350+150
1
2
3
4
5
6
7
8
9
10
Cash flow
90
80
70
60
40
30
30
20
10
0
Maximum amount
$312.24
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