Valuation of a Merger 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 by an additional 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

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The NPV of the merger is calculated by discounting the future cash flows at the WACC of 10%. The cash flows grow at 4% (1% + 3% synergy) for the first four years and then at 2% thereafter. The present value of these cash flows exceeds the asking price of $195 million, resulting in a positive NPV.

Valuation of a Merger Windows N Such, Inc ≥\ge≥ $0 B) Yes, the NPV Is

Valuation of a Merger Windows N Such, Inc $\ge$ $0
B) Yes, the NPV Is