The following table shows the projected free cash flows of an acquisition target. The potential acquirer wants to estimate its maximum acquisition price at an 8 percent discount rate and a terminal value in year 5 based on the perpetual growth equation with a 4 percent perpetual growth rate.

Year 1 2 3 4 5 Free cash flow –800 –400 0 200 700

a. Estimate the target’s maximum acquisition price.

b. Estimate the target’s maximum acquisition price when the discount rate is 7 percent and the perpetual growth rate is 5 percent.

c. Considering your answers to parts

(a) and

(b) of this question, what is the percentage change in the maximum acquisition price when the discount rate is reduced one percentage point and the perpetual growth rate is increased one percentage point? LO.1