Question

The table below shows the projected free cash flows of an acquisition target. The discount rate to value the target is 11% discount rate. The acquiring company expects the terminal period to begin at the end of 2022 with a perpetual growth rate of 3% from that point on.

YEAR	2018 (Year 0)	2019 (Year 1)	2020 (Year 2)	2021 (Year 3)	2022 (Year 4)
FREE CASH FLOW ($ thousands)	-$263	$68	$87	$89	$92

The Present Value of $1 Table (Table 3) tells us:

Period (n)	Present Value Factor at 11% Discount Rate
1	.901
2	.812
3	.731
4	.659

Terminal Value using perpetual growth equation:

FCFT +1      
Kw – g

Question:
Based on the information above, what is the Maximum Acquisition Price (MAP) the acquirer would pay for this target as of 12/31/18?
Hint: You need to use the present value table to discount 2019 through 2022 cash flows to the end of 2018 (Year 0) and add it to the terminal value at the end of 2022 discounted to the end of 2018.

Answer 1

Answer : Calculation of Maximum Acquisition Price (MAP) the acquirer would pay for this target as of 12/31/18

Below is the table showng calculation of Maximum Acquisition Price (MAP)

Year	Free Cash Flow	PVF @ 11%	Present value of Cash Flows
1	68	0.901	61.268
2	87	0.812	70.644
3	89	0.731	65.059
4	92	0.659	60.628
4(Terminal Value)	1162.5	0.659	766.0875
		Maximum Acquisition Price (MAP)	1023.6865

Terminal Value = (FCFT + 1) / (Kw - g)

= (92 + 1) / (0.11 - 0.03)

= 1162.5