Question

How would I determine what is the highest price (total amount, not per share) company A...

How would I determine what is the highest price (total amount, not per share) company A should offer Company B for a cash acquisition based on the estimated future incremental cash flows? Would I be using the NPV formula with just using the estimated cash flows and the cost of capital?

Homework Answers

Answer #1

Hello,

NPV = Discounted Cash Inflows - Discounted cash outflows, here outflow is the purchase price of company A. Inflows are the future cash flows..

NPV formula is used to determine whether benefits (inflows) are more than costs (outflow) which will help in deciding whether to purchase the company or not.

To find the highest price of the company, simply find the Present Value of all the future cash flows of the company using 'cost of capital' as the discount rate.

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