If your company proceed with the acquisition exercise CADBURY above at N 15 and you acquire 850,000,000
Question:
If your company proceed with the acquisition exercise CADBURY above at N 15 and you acquire 850,000,000 shares of the company, prepare a cash flow analysis based on the following assumption :
The acquisition will be funded through borrowing from bank at an interest rate of 8% per annum.
The share price is expected to perform based on the projected profit for the next five years as follows:
2022 N 633,169,333
2023 N 934,150,250
2024 N 1,359,350,240
2025 N 1,625,350,240
2026 N 1,924,250,250
The Price Earning ratio (PER) is expected to stay constant
Share price will be determined by : Share price = EPS X PER
Cadbury is expected to pay dividend on the shareholders at 6% per annum.
Discount factor will be at the costs of fund – which is 8% per annum
The company plan :
To sell 10% of the share after year 3
To sell another 10% at the end of year 5
The rest of the shares will be kept as long term investment
Required :
Prepare a projected cashflow statement showing :
Cash outflow from investment
Cash inflow from the sales of investment
Annual cash inflow from dividend
Calculated the present value of the cash flow
Determine the Net present value of the cashflow
Based on the calculation determine whether the acquisition of the company is viable.
Horngrens Accounting
ISBN: 978-0133855388
10th Canadian edition Volume 2
Authors: Tracie L. Miller Nobles, Brenda L. Mattison, Ella Mae Matsumura, Carol A. Meissner, Jo Ann L. Johnston, Peter R. Norwood