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- $\mathrm{ \; \; \; \; \; \; \; \; \; \; \; \; \; \; 1}\mathrm{ \; \; \; \; \; 2}\mathrm{ \; \; 3}\mathrm{ \; \; \; 4}\mathrm{ \; \; \; \; 5}$

Free cash flow $-1,000-500\mathrm{ \; 0}\mathrm{ \; \; 3}20\mathrm{ \; 9}40$

Estimate the target$’$s maximum acquisition price.

Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.

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

Answer rating: 100% (QA)

To estimate the targets maximum acquisition price we need to calculate the present value of the proj... View the full answer