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

-If the project were financed completely with equity (retained earnings)and the required return remained unchanged post-acquisition,what is the most Needsalift would be willing to pay for Nothing Better! Ice Creams?

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

-If the project were financed completely with equity (retained earnings)and the required return remained unchanged post-acquisition,what is the most Needsalift would be willing to pay for Nothing Better! Ice Creams?

Quizplus · Accepted Answer

The Answer is B

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