Hi-Tec Corporation is considering the acquisition of Lo-Tec, Inc., which is in a related line of business. Lo-Tec, an all-equity-financed firm, currently has an after-tax cash flow of $2 million per year. With a merger, synergy would be expected to result in a growth rate of this cash flow of 15 percent per year for 10 years, at the end of which time level cash flows would be expected. To sustain the cash-flow stream, Hi-Tec will need to invest $1 million annually. For purposes of analysis and to be conservative, Hi-Tec limits its calculations of cash flows to 25 years.

a. What expected annual cash flows would Hi-Tec realize from this acquisition?

b. If its required rate of return is 18 percent, what is the maximum price that Hi-Tec could pay?

Answer rating: 100% (QA)

Expected Cash Flow Year Cash flow Growth Rate 0 2000000 1 2300000 ... View the full answer