Question

30. ABC Corp acquires a firm for $9.7 billion using a cost of capital of 11% the CF all is certain the acquisition Will have conventional cash flows and I paid that period of five years (ignoring time value of money). but she is uncertain whether the acquisition will potentially turn out really bad for the firm she wants your advice can you estimate an upper limit on how much value can be destroyed by this acquisition?

$7.17 billion

$9.7 billion

No limit to how much value can be destroyed if the acquisition goes bad

$5.76 billion

$3.94

Answer 1

Answer-  

Firm's acquisition cost by ABC Corp. = $ 9.7 billion
Cost of capital = 11 % = 0.11

Due to uncertain cash flows the firm might end up with no cash flows ie. $ 0 ( ignoring time value of money).
Number of years = 5 years

The reduction in value due to no cash flows with cost of value = Acquisition cost / ( 1 + 0.11)5

= $ 9.7 billion / (1.11)5
= $ 9.7 billion / 1.685
= $ 5.756 billion
= $ 5.76 billion

Therefore the reduced value after acquisition wihout cash flows = $ 5.76 billion

The upper limit of value that can be destroyed by this acquisition = $ 9.7 billion - $ 5.76

The upper limit of value that can be destroyed by this acquisition = $ 3.94 billion  

The Correct Option is the last Option $ 3.94 billion.