Question

Hawk, Inc. considers the Pepsi Bottling Company and Coca Cola Bottling Company in

San Bernardino for business acquisition. Financial analysts specialized in valuation of soft drink companies estimated that Pepsi bottling will earn $400,000 a year over the next 25 years, while Coca-Cola Bottling will earn $600,000 over the next 30 years. Due to different credit rating of

the two companies, the prevailing market interest rate of Pepsi is 10% and that of Coca-Cola is 8%. The Pepsi is asking $3,400,000, while The Coca-Cola is asking $6,000,000. Which is the

better company for Hawk to take over?

Answer 1

Calculating NAV of Both Companies

a. NAV of Pepsi Bottling Company :

= (Present Value of Future Cash Flows discounted at market interest rate of Pepsi) - (Acquisition Cash Outflow)

= $400,000(PVAF @ 10%, 25 Years) - $3,400,000

= $400,000(9.07704) - $3,400,000

= $3,630,816 - $3,400,000

= $230,816

b. NAV of Coca-Cola Bottling Company :

= (Present Value of Future Cash Flows discounted at market interest rate of Coca-Cola) - (Acquisition Cash Outflow)

= $600,000(PVAF @ 8%, 30 Years) - $6,000,000

= $600,000(11.257783) - $6,000,000

= $6,754,670 - $6,000,000

= $754,670

Being NAV of Coca-Cola being more than Pepsi, Coca-Cola is the better company for Hawk to take over.