A firm is considering acquiring a competitor. The firm plans on offering $160 million for the competitor. The firm will need to issue new debt and equity to finance the acquisition. You estimate the issuance costs to be $10 million. The acquisition will generate an incremental free cash flow of $20 million in the first year and this cash flow is expected to grow at an annual rate of 3% forever. If the firm's WACC is 13%, what is the value of this project?

Question

Quizplus · Accepted Answer

A) NPV = FCF₀ + FCF₁/(r_wacc - g) FCF₀= -$160 - $10 = -$170 NPV = -$170 + $20 / (0.13 - 0.03) = $30.00 million

A Firm Is Considering Acquiring a Competitor