Question: You are the director of capital acquisitions for Morningside Hotel

You are the director of capital acquisitions for Morningside Hotel Company. One of the projects you are deliberating is the acquisition of Monroe Hospitality, a company that owns and operates a chain of bed-and-breakfast inns. Susan Sharp, Monroe’s owner, is willing to sell her company to Morningside only if she is offered an all-cash purchase price of $5 million. Your project analysis team estimates that the purchase of Monroe Hospitality will generate the following after-tax marginal cash flow:
Year Cash Flow
1 ............. $1,000,000
2 ............. 1,500,000
3 ............. 2,000,000
4 ............. 2,500,000
5 ............. 3,000,000
If you decide to go ahead with this acquisition, it will be funded with Morningside’s standard mix of debt and equity at the firm’s weighted average (after-tax) cost of capital of 9%. Morningside’s tax rate is 30%. Should you recommend acquiring Monroe Hospitality to your CEO?

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  • CreatedMarch 26, 2015
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