Suppose that your firm is considering divesting (i.e., selling) one of its product lines. You have...

 

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Suppose that your firm is considering divesting (i.e., selling) one of its product lines. You have been approached by a prospective buyer that is willing to pay as much as €25 million for it. The product line is expected to generate a cash flow of €2 million during the next year of operations. Thereafter, annual cash flows are expected to grow at a rate of 3% in perpetuity. The risk of the product line is comparable to that of the overall stock market, whose annual rate of return is estimated to be 10%. On the other hand, risk-free investment opportunities currently yield a 2% annual rate of return. Should you accept the offer of the prospective buyer? Suppose that your firm is considering divesting (i.e., selling) one of its product lines. You have been approached by a prospective buyer that is willing to pay as much as €25 million for it. The product line is expected to generate a cash flow of €2 million during the next year of operations. Thereafter, annual cash flows are expected to grow at a rate of 3% in perpetuity. The risk of the product line is comparable to that of the overall stock market, whose annual rate of return is estimated to be 10%. On the other hand, risk-free investment opportunities currently yield a 2% annual rate of return. Should you accept the offer of the prospective buyer?

Answer rating: 100% (QA)

To determine whether you should accept the offer from the prospective buyer we need to calculate the ... View the full answer