Question

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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