You are the CEO of a specialist tourism company called Travel, Entertainment and Leisure (Symbol: TEAL). You are considering the acquisition of a rival company to expand your capacity. The following information applies to the acquisition:

 

*The purchase price you negotiated is $50 mln, payable immediately upon completion of the deal;

 

*The acquisition will increase TEAL's free cash flows by $8 mln in the first year, and this contribution is expected to grow at 2% per year indefinitely thereafter;

 

*TEAL always maintains a debt-to-equity ratio of 1;

 

*TEAL's corporate tax rate is 35%, its cost of debt is 5%, and its unlevered WACC is 7%;

 

*The acquisition has the same risk as TEAL's existing assets.

 

 

(a)    Determine the value of this acquisition using the WACC method.

 

(b)    Determine the value of this acquisition using the APV method.

 

(c)     Determine the value of this acquisition using the FTE method.

  

Note: the cash flows stemming from the acquisitions last in perpetuity. You may assume that the acquisition becomes worthless in 10 years, if that simplifies your calculations.

Answer rating: 100% (QA)

SOLUTION a Valuation using the WACC method The WACC method calculates the present value of the future cash flows discounted at the weighted average cost of capital WACC Step 1 Calculate TEALs WACC We ... View the full answer