Firms A and B are competitors. Both have similar assets and business risks and are all-equity ﬁrms. Firm A has after-tax cash ﬂow of $20,000 per year forever and ﬁrm B has after-tax cash ﬂow of
$150,000 per year forever. If the two ﬁrms merge, the perpetual after-tax cash ﬂow will be $179,000.
If the appropriate discount rate is 15% what is the MOST B will pay for A?
A) $9,000
B) $20,000
C) $60,000
D) $133,333
E) $193,333

Question

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The Answer of Firms A and B are competitors. Both have similar assets and business risks and are all-equity ﬁrms. Firm A has after-tax cash ﬂow of $20,000 per year forever and ﬁrm B has after-tax cash ﬂow of
$150,000 per year forever. If the two ﬁrms merge, the perpetual after-tax cash ﬂow will be $179,000.
If the appropriate discount rate is 15% what is the MOST B will pay for A?
A) $9,000
B) $20,000
C) $60,000
D) $133,333
E) $193,333

Firms a and B Are Competitors