Homework1 Mr. L. Messi is in negotiation with Dr. S. Gerrard to purchase Gerrard

Question

Homework1 Mr. L. Messi is in negotiation with Dr. S. Gerrard to purchase Gerrard Corporation (GC). GC is a well-managed company , which is involved in production of exceptionally high quality furniture sets. GC is expected to sell 600 furniture sets annually at a price of $150,000 per set. Mr. Messi is convinced that he can easily raise the price of each set at a rate of 6.82% per year over the next 13 years without affecting the annual sales. Mr. L. Messi believes he can sell GC at end of 13 years for $130,000,000. Mr. L. Messi?s required rate of return is 12%. How much do you think Mr. Messi should pay for GC? Why, Please explain?

Explanation / Answer

In this question, we need to find two things and add them up. Mr. Messi has two sources of income, 1) by selling the furniture and by selling Gerrard Corporation. He is paying for two streams of income.

We need to find the:-

a) PV of the Gerrard Corporation, which we can calculate by using the FV = $130,000,000. Time = 13 years and Rate of return = 12%

b) PV of the ordinary annuity. We need to find the PV using rate = 6.82%, time = 13 years and yearly payments of 600 units * $150,000 = $90,000,000.

Solving (A) = PV = FV / (1 + r) n = PV = $130,000,000 / (1.12)13 = $29,792,644.72

Solving (B) = We will solve this using a financial calculator or excel. Using N = 13. I/Y = 6.82%. PMT = $90,000,000 and solving for PV. So, we have = $759,923,129.2

Adding A and B, we have = $789,715,774. This the PV of all the future inflows of income/cash. Mr. Messi should not pay any price more than this.

I hope my solution solves your query.

Regards.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.