You have been asked to evaluate a potential aquisition of a smaller privately owned competitor. The aquisition canidate produces an EBITDA of (199,400) and is offered to your firm at a price of 8 times that figure (1,595,200)

Assume the following

-Current debt costs you 8% and you can raise additional debt at this rate today. The loan is to be ammoritized over 7 years.

-Current return on equity is 15%

-Current WACC is 10%

-Tax Rate is 30% (Constant)

-80% of the purchase price is considered depreciable assets to be depreciated over 10 years on a straight-line basis with no residual values.

-Reaidual value for this operation is to be 2x current EBITDA in year 10

Create an after-tax cash flow analysis to answer the following

-Economic analysis: is this a fundamentally sound investment?

-Using the tax cash flows and no debt (pure equity), is the prospect a positive NPV using ROE as the hurdle rate?

-Using the after tax cash flows and the firms WACC, is this project desireable?

Answer rating: 100% (QA)

Economic Analysis The economic analysis of this potential acquisition indicates that it is a fundame... View the full answer