Windows N Such, Inc., is asking a price of $195 million to be purchased by Curtain Rods Corp. The two firms currently have cumulative total cash flows of $15 million which are growing at 1 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase to 3 percent for the first four years following the merger. After the first four years cash flows will grow at a rate of 2 percent. The WACC for the merged firms is 10 percent. Calculate the NPV of the merger. Should Curtain Rods Corporation agree to acquire Windows N Such, Inc., for the asking price of $195 million?

Question

Quizplus · Accepted Answer

The NPV of the merger is calculated by discounting the future cash flows of the merged entity at the WACC and then subtracting the purchase price. The initial cash flows are $15 million, growing at 3% for the first four years and then at 2% thereafter. The WACC is 10%. The calculation shows that the present value of the future cash flows, considering the growth rates and the WACC, exceeds the purchase price of $195 million, resulting in a positive NPV. Therefore, acquiring Windows N Such, Inc., is financially beneficial for Curtain Rods Corporation.