A firm is considering acquiring a competitor for $200 million. The resulting increase in free cash flows will be $8 million the first year, increasing by 2% every year thereafter. The firm’s current and target D/E ratio is 1 and will remain constant, its marginal tax rate is 30%, its cost of debt rD is 4%, and its cost of equity rE is 8%. If the acquisition is funded by a debt issue of $100 million what is the acquisition’s total value based on its APV?

Answer rating: 100% (QA)

Total fund required for acquisition 200 million STEP 1 Lets suppose ... View the full answer