Zappa Inc. is considering acquiring the Jones Co. They are trying to estimate the value of the target firm. Recently, the Jones Co. reported cash flows of $15,000,000. The executives at Zappa Inc. estimate that the cash flows of the Jones Co. will grow at 4.50% in the future, and that 11.50% is a reasonable discount rate for these cash flows. The expect the merger to generate $3,500,000 per year into the future.

Based on these assumptions, what is a reasonable price to pay for the Jones Co.?

Answer rating: 100% (QA)

To estimate the price to pay for the Jones Co we can use the Gordon Growth Model a version of the Di... View the full answer