Pharmaceuticals is considering the purchase of Manufacturing. Pharmaceuticals is

Question

Pharmaceuticals is considering the purchase of Manufacturing. Pharmaceuticals is currently a supplier for Manufacturing, and the acquisition would allow Pharmaceuticals to better control its material supply. The current cash flow from assets for Manufacturing is $7.9 million. The cash flows are expected to grow at 8 percent for the next five years before leveling off to 5 percent for the indefinite future. The cost of capital for Pharmaceuticals and Manufacturing is 12 percent and 10 percent, respectively. Manufacturing currently has 3 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Pharmaceuticals should pay for Manufacturing?

Explanation / Answer

PV of cashflow= (7.9x1.08/1.1)+(7.9x1.08^2/1.1^2)+(7.9x1.08^3/1.1^3)+(7.9x1.08^4/1.1^4)+(7.9x1.08^5/1.1^5)+[(7.9x1.08^5x1.05)/1.1^5(.1-.05)]= $188.7537093million

maximum price per share = 188.7537093million/(3+25)= $6.74

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

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