Acquiring Company is considering buying Target Company. Target Company is a smal

Question

Acquiring Company is considering buying Target Company. Target Company is a small biotechnology firm that develops products licensed to the major pharmaceutical firms. Development costs are expected to generate negative cash flows during the first two years of the forecasted period of $(10) million and $(5) million, respectively. Licensing fees are expected to generate positive cash flows during years 3 through 5 of the forecast period of $5 million, $10 million, and $15 million, respectively. Because of the emergence of competitive products, cash flow is expected to grow at a modest 5% annually after the fifth year. The discount rate for the first five years is estimated to be 20% and then drop to the industry average rate of 10% beyond the fifth year. Also the present value of the estimated net synergy by combining Acquiring and Target companies is $30 million. Calculate the minimum and maximum purchase price for Target Company.

Explanation / Answer

Year Cash flows PV factor @20% PVs for 1-5 yrs. 1 -10000000 0.833 -8330000 2 -5000000 0.694 -3470000 3 5000000 0.579 2895000 4 10000000 0.482 4820000 5 15000000 0.402 6030000 1945000 Present value of the synergy                                             30000000 Terminal value = (15 million * 1.05) / (0.10 - 0.5) / 2..4883 - PV factor for 5th year        = 126590000 minimum price = $ 1945000 + 126592453 = $ 128537453 Maximum price - $ 128537453 + 30000000 = $158537453

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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