Your firm is involved in a bidding war for an acquisition. The firm to be acquir

Question

Your firm is involved in a bidding war for an acquisition. The firm to be acquired has annual cash flows of $719,000. The appropriate discount rate to use is 6.6%. Find the value of this acquisition, assuming the following scenarios: it is a no-growth firm it is a constant growth firm, with g=0.04 it is a variable growth firm, with gt=0.10 for three years, and gm=0.04. Enter your estimate for all three scenarios in the Valuation Forum. The winning bid for each scenario will be the highest bid offered, so long as the estimate does not exceed the true value of the firm.

Explanation / Answer

Scenario 1: No growth

Estimated valuation = 719000/6.6%=10,893,939.39

Scenario 2

Estimated valuation = 719000/(6.6% -4%)=27,653,846.15

Scenario 3

Estimated valuation = 719000/1.066 + 719000*1.1/1.066^2 + 719000*1.1^2/1.066^3 + 719000*1.1^3/1.066^4 + (719000*1.1^3*1.04/(6.6%-4%))/1.066^4= 32,473,868.10

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