Needsalift, Inc.
You are analyzing the potential acquisition of Nothing Better! Ice Creams, Inc. by your firm, Needsalift, Inc. The ice cream firm is a wholly owned subsidiary of Grand Lake Investments, which has set a firm selling price of $10,000,000. From your work you estimate that Nothing Better! will generate the following incremental cash flows for Needsalift:

Year Incremental Cash Flow
1 $1,000,000
2 $1,500,000
3 $3,000,000
4 $4,000,000
5 $4,500,000

To fund the $10 million price, Needsalift can use $2 million from internal sources (retained earnings) with a required return of 15 percent, while the rest would come from a new debt issue yielding 10 percent. Needsalift’s tax rate is 40 percent

-What is the value of the proposed acquisition to Needsalift?

Question

Needsalift, Inc.
You are analyzing the potential acquisition of Nothing Better! Ice Creams, Inc. by your firm, Needsalift, Inc. The ice cream firm is a wholly owned subsidiary of Grand Lake Investments, which has set a firm selling price of $10,000,000. From your work you estimate that Nothing Better! will generate the following incremental cash flows for Needsalift:

Year	Incremental Cash Flow
1	$1,000,000
2	$1,500,000
3	$3,000,000
4	$4,000,000
5	$4,500,000

To fund the $10 million price, Needsalift can use $2 million from internal sources (retained earnings) with a required return of 15 percent, while the rest would come from a new debt issue yielding 10 percent. Needsalift’s tax rate is 40 percent

-What is the value of the proposed acquisition to Needsalift?

Quizplus · Accepted Answer

To value the acquisition, we calculate the Net Present Value (NPV) of the incremental cash flows, considering the weighted average cost of capital (WACC). The WACC takes into account the cost of equity (retained earnings at 15%) and the cost of debt (10%), adjusted for the tax shield (1 - tax rate). Given the financing structure (20% equity, 80% debt), the WACC is calculated as follows: WACC = (20% * 15%) + (80% * 10% * (1 - 40%)). The NPV of the cash flows at this WACC gives the value of the acquisition, which is $10,666,344, indicating the acquisition is financially beneficial to Needsalift, Inc.

Needsalift, Inc. You Are Analyzing the Potential Acquisition of Nothing Better! Ice