Question

The table below shows the projected free cash flows of an acquisition target. The discount rate to value the target is 9% 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)	-$171	$56	$72	$87	$92

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

Period (n)	Present Value Factor at 9% Discount Rate
1	.917
2	.842
3	.772
4	.708

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

Terminal value in year 4 = Year 4 FCF * (1 + perpetual growth rate) / (discount rate - perpetual growth rate)

Terminal value in year 4 = $92,000 * (1 + 3%) / (9% - 3%) = $1,579,333

Maximum Acquisition Price = present value of next 4 years FCF + present value of terminal value

Present value = future value * present value factor

Maximum Acquisition Price = $1,191,444