You are a partner of Private Equity Firm, Lion LLC (Acquiring firm) and you have

Question

You are a partner of Private Equity Firm, Lion LLC (Acquiring firm) and you have the following information for the acquisition of the firm, ABC Corp (target firm), which is currently your project The target firm is a private firm. Suggested bidding price for the target $147 million comparable firms of the target firm: unlevered cost of capital 6.54% .Five year estimation of free cash flow to the firm (FCF) and interest tax shields o FCF: 13 million (t-1), 7.4 milion (t-2), -5.8 million (t-3), 1.4 milion (t-4), and 10.3 million (t-5) -determined Interest tax shields: $2.3 million at t-1, $2.3 million at t 2, $2.3 million at t 3, $2.7 million at t-4, $2.8 million at t5 Estimation of FCF at t 6 is $11 million (after t 6 and beyond, FCF will grow at the constant growth rate = 5% and cost of capital = 996) Question : Perform NPV analysis for this project using APV method. (You should include discounted cash flows for five years as well as continuation value)

Explanation / Answer

Terminal Value in year 5, TV5 = FCF6 / (r - g) = 11 / (9% - 5%) = $275

Using APV, NPV = PV of FCF + PV of tax shield

PV of FCF = -FCF0 + FCF1 / (1 + r) + ... + (FCF5 + TV5) / (1 + r)^5

= -147 + 13 / 1.0654 + 7.4 / 1.0654^2 + ... + (10.3 + 275) / 1.0654^5

= $75.86

PV of tax shield = 2.3 / 1.0654 + 2.3 / 1.0654^2 + ... + 2.8 / 1.0654^5 = $10.22

=> NPV = $75.86 + $10.22 = $86.08

Year FCF TV Tax Shield 0 -$    147.00 1 $       13.00 $     2.30 2 $         7.40 $     2.30 3 -$        5.80 $     2.30 4 $         1.40 $     2.70 5 $       10.30 $ 275.00 $     2.80 6 $       11.00

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